Euro advances to one-month high as Spain keeps investment grade

No Junk

Moody’s said yesterday it kept Spain’s credit rating at Baa3, one step above junk, as the risk that the nation would lose market access had fallen because of the European Central Bank’s willingness to purchase its bonds.

Germany is open to Spain seeking a precautionary credit line from Europe’s rescue fund, two senior coalition lawmakers said yesterday. The comments by Michael Meister, a deputy caucus leader of Chancellor Angela Merkel’s Christian Democratic bloc, and Norbert Barthle, the budget spokesman, indicate a rolling back of German resistance to a full sovereign bailout for Spain.

Spain’s 10-year bond yield fell as much as 29 basis points to 5.51 percent, the lowest since April 4, while Italian 10-year yields declined to the least since March 19. Benchmark Spanish borrowing costs have dropped more than 2 percentage points from their record high of 7.75 percent on July 25.

Options traders are the least bearish on the euro versus the dollar in more than two years.

Option Premium

The premium for six-month options granting the right to sell the euro against the dollar relative to those allowing for purchases was 1.15 percentage points, the least since Oct. 15, 2010, based on closing prices compiled by Bloomberg. That’s down from a 2012 high of 3.715 percentage points on May 23, the 25- delta risk reversal rate show.

Risk reversals measure the difference between implied volatility, or a gauge of price and demand, on similar puts and calls. Traders pay a premium for puts when they expect the euro to decline.

“The euro rebound has accelerated, reflecting building investor optimism regarding Spain,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note to clients. Sentiment was also helped “by speculation that Germany has softened its stance to Spain requesting a precautionary credit line,” he wrote.

The Dollar Index dropped for a second day as housing starts jumped 15 percent to an 872,000 annual rate last month, the most since July 2008 and exceeding all forecasts in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. The median estimate of 81 economists surveyed by Bloomberg called for 770,000.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, declined 0.6 percent to 78.968, touching the lowest level since Sept. 18.

Bloomberg News

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