The Sun Won't Stay Out Long For Euro. By Nicholas Hastings
Euro bulls should make hay while the sun shines, as the sun won't stay out for long.
The current euro rally could well last a little longer - sending the single currency to a new high for the year over $1.4339.
Click Image to Enlarge
However, as optimism about the global economy is seen subsiding in the weeks to come and risk appetite declines again, the market is likely to focus on both the problems facing European banks as well as the deflationary risks still troubling the euro-zone economy.
The latest rise in the euro, which took it up through $1.4200 for the first time in over six weeks, has coincided with the second-quarter earnings season that has brought much better results than financial markets have been anticipating.
Ally this with some stronger-than-expected U.S. economic data last week and risk appetite has taken off again - to the benefit of relative high-yielders such as the euro.
Hopes that euro-zone data at the end of this week will also show some strength have only helped to feed the euro-buying frenzy.
However, the positive corporate earnings that came through last week may not last this week when as many 140 companies will be reporting.
"Earnings for non-financial corporations are less likely to be rosy than those of last week's financials and we expect euro/dollar to become vulnerable to lower risk appetite," said the currency strategy team at BNP Paribas.
Also this week, if U.S. Federal Reserve Chairman Ben Bernanke suggests in his testimony to Congress that the central bank is now looking at exit strategies from the current policy of quantitative easing, this could well push yields higher and support the dollar.
However, developments in the euro zone economy could well prove the euro's undoing.
Last weekend brought news that Germany's troubled Hypo Real Estate will need another EUR10 billion injection from the government if it is to stay afloat.
At the same time, the problems of the region's banks are coming to a head with press reports that German banks will be forced to accept a U.S.-style recapitalization program despite initial suggestions that German politicians were opposed to such a plan.
Economically, there is still evidence of deflation risks given that German producer prices showed a 0.1% decline in June instead of the 0.4% rise that had been expected.
If so, then downward pressure on euro-zone interest rates could well be building just at the time that upward pressure on U.S. rates starts to emerge.
Chances are that optimism over the global recovery will also fade in weeks to come as economic data fail to live up to rising expectations.
"We remain convinced that this optimism is misplaced and that when it becomes apparent that the green shoots were those of the bonsai variety, a significant re-rating of risk is likely," the BNP Paribas team warned.
Early Tuesday, the euro was under pressure after Bernanke made it clear that he isn't expecting any early economic recovery.
In an opinion piece in the Wall Street Journal Tuesday, he outlined the Fed's exit strategies but warned that "economic conditions are not likely to warrant tighter monetary policy for an extended period."
By 0645 GMT, the euro had slipped back to $1.4196 from $1.4229 late on Monday in New York, according to EBS. It was also down at Y133.25 from Y134.09 while the dollar fell to Y93.90 from Y94.23.
The current euro rally could well last a little longer - sending the single currency to a new high for the year over $1.4339.
Click Image to Enlarge
However, as optimism about the global economy is seen subsiding in the weeks to come and risk appetite declines again, the market is likely to focus on both the problems facing European banks as well as the deflationary risks still troubling the euro-zone economy.
The latest rise in the euro, which took it up through $1.4200 for the first time in over six weeks, has coincided with the second-quarter earnings season that has brought much better results than financial markets have been anticipating.
Ally this with some stronger-than-expected U.S. economic data last week and risk appetite has taken off again - to the benefit of relative high-yielders such as the euro.
Hopes that euro-zone data at the end of this week will also show some strength have only helped to feed the euro-buying frenzy.
However, the positive corporate earnings that came through last week may not last this week when as many 140 companies will be reporting.
"Earnings for non-financial corporations are less likely to be rosy than those of last week's financials and we expect euro/dollar to become vulnerable to lower risk appetite," said the currency strategy team at BNP Paribas.
Also this week, if U.S. Federal Reserve Chairman Ben Bernanke suggests in his testimony to Congress that the central bank is now looking at exit strategies from the current policy of quantitative easing, this could well push yields higher and support the dollar.
However, developments in the euro zone economy could well prove the euro's undoing.
Last weekend brought news that Germany's troubled Hypo Real Estate will need another EUR10 billion injection from the government if it is to stay afloat.
At the same time, the problems of the region's banks are coming to a head with press reports that German banks will be forced to accept a U.S.-style recapitalization program despite initial suggestions that German politicians were opposed to such a plan.
Economically, there is still evidence of deflation risks given that German producer prices showed a 0.1% decline in June instead of the 0.4% rise that had been expected.
If so, then downward pressure on euro-zone interest rates could well be building just at the time that upward pressure on U.S. rates starts to emerge.
Chances are that optimism over the global recovery will also fade in weeks to come as economic data fail to live up to rising expectations.
"We remain convinced that this optimism is misplaced and that when it becomes apparent that the green shoots were those of the bonsai variety, a significant re-rating of risk is likely," the BNP Paribas team warned.
Early Tuesday, the euro was under pressure after Bernanke made it clear that he isn't expecting any early economic recovery.
In an opinion piece in the Wall Street Journal Tuesday, he outlined the Fed's exit strategies but warned that "economic conditions are not likely to warrant tighter monetary policy for an extended period."
By 0645 GMT, the euro had slipped back to $1.4196 from $1.4229 late on Monday in New York, according to EBS. It was also down at Y133.25 from Y134.09 while the dollar fell to Y93.90 from Y94.23.
- 21 July |
- 0 comments
Post new comment