An austerity-growth Armageddon for the euro
Monday’s economic docket was relatively uneventful and the US was on holiday as they celebrated Memorial Day. In the absence of data, at week start sentiment drifted on news headlines - investors welcomed some sober news however. Over the weekend opinion polls from Greece (ahead of 17th June elections) showed that the Syriza lost the lead, they held for most of the time since the May 6th polls and that they had been surpassed by the New Democracy – why is that important? Because the Syrizas are anti-bailout; while the New Democracy are pro-bailout.
In fact of the three parties that attracted the majority of votes at Greece’s last election ( Syriza, New Democracy, and the Pasok), it is only the Syrizas which are anti-bailout. As discussed in last week’s weekly commentary the cost of a Greek exit is far larger than them staying aboard. Interestingly enough as well ekathemirini.com reports that 9 in 10 Greeks want Greece to remain in the euro zone.
Greece was not the only market mover however. Last Friday the regional president of Spain’s Catalonia region called onto the Government for financial assistance after declaring that they were running out of financing options - this eroded support for the euro pushing the EUR/USD to lows last seen back in July 2010, as it embraced daily lows of 1.2496.
Europe’s debt challenge is keeping investors edgy; the 10-yr benchmark for Spanish debt is seeing fresh highs close to 6.5%. Spanish yields over benchmark 10-yr German bunds are at record highs as well – yet the ECB has reported that it has made no new purchases under its Securities Market Program (SMP) for an 11th week.
Over the weekend a Financial Times article also helped to fan optimism as it elaborated on new Spanish solutions to recapitalize banks; by issuing sovereign debt directly to the banks so that the ECB may than offer cash against collateral of the same bonds.
On a weekly time frame the EUR/USD has continued through the bearish channel delineated by highs of September ‘11, October ’11, May ’12 and lows of October’11, January’12. Given the weaker fundamental data out of the euro zone and the region’s austerity-growth Armageddon we would expect the bearish bias to remain predominant. In the coming weeks; to the downside the currency pair may be eyeing 1.20/1.1876 while upward moves should not breech 1.29/1.30 – the upper line of the bearish channel.
The buildup of short euro positions may inevitably lead to short term bounces higher as some overstretched portfolios will have to pause for breath if the downtrend cools – simply put those investors that are heavily short will be forced to buy back some euro if the EUR/USD temporarily stops going lower or consolidates. The process of buying back, or short covering, could lead to short term corrections higher in the price for the EUR/USD.
Late Monday Reuters reported that Greece handed over 18 billion euros to its four largest banks, in efforts to replenish their capital base. The funds were in the form of bonds from the European Financial Stability Facility (EFSF). The replenishing of the capital base allows the bank to regain access to ECB liquidity – last week the ECB had stopped providing liquidity to some Greek banks due to the depletion of their respective capital bases.
So far this week the GBP/USD has traded in the range of 1.5655 – 1.5717; while the EUR/GBP was traded in the range of 0.7983 – 0.8037. Throughout most of May the GBP shed 3.46% to the USD but was stronger against the weaker euro, where it gained 1.84%.
The British pound is now being seen as a mild safe haven – but in reality while it offers a good alternative to euro outflows the faith of the euro zone will have a significant impact on the UK and the GBP, so the currency might come out as undecided at times.
Ahead of us next Friday, US NonFarm Payrolls for the Month of May will be much awaited as investors keep an eye for the health check of the labour market of the world’s largest economy – the US economy is expected to have created 150k new jobs after the 115k already registered in April.
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This article has been prepared by Rudolf Muscat, Senior Trader at RTFX Ltd.
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