After a very tumultuous week the euro/dollar has finally found some support at the 1.3000 level as credit spreads in the Eurozone started to narrow.

In the aftermath of Thursday's successful Spanish bond auction which saw the country raise nearly 6 Billion euros versus its original target of 2.5 billion, investor sentiment improved markedly, helping to stabilise the single currency. 

Although both Italian/German and Spanish/German bond spreads compressed, they remain well above their pre-crisis levels and if this dynamic continues it will once again begin to pressure the euro/dollar at the start of next year.

The problems is that both Italians and Spaniards face much higher refinancing costs in 2013. Italy has more than 300 billion euros of debt that it must roll over in 2013 and it may have to pay as much 200 to 300 basis points in order to attract capital from from the sovereign debt markets.

That increase in debt service will offset any savings made by the new budget austerity measures proposed by the government of Mario Monti undoubtedly creating fresh political tensions in Italy, as the country will be forced to sacrifice on services and benefits only to pay more to investors. 

Meanwhile the Germans refuse to consider any move towards a Eurobond solution and are even wary of using the International Monetary Fund (IMF) as an intermediary source of bailout funds. The latest reports out of Berlin suggested that that the Bundesbank strongly objects to using the IMF because under international rules the IMF will be repaid first putting German contributions to the bailout fund at risk if an EU member nation were to go broke.

As the largest contributor to the EFSF, Germany is very concerned that it will be exposed to massive losses if the IMF takes a role in the rescue process. 

All of this political jockeying leaves the euro/dollar vulnerable to further selling pressures in 2013 if European leaders are unable to produce a comprehensive fiscal integration plan to satisfy the markets.

The pair may have found some temporary relief as traders leave their desks for end of the year holidays, but the volatility could return with a vengeance once investors return to work and focus on the refinancing problems facing Club Med nations next year.