The Euro Is Edging Closer To The Precipice. By Nicholas Hastings
Is the euro set for a nasty blowout?
That is the question taxing players in the currency market as they watch Greek bond yields head higher again.
This rise in Greece's funding costs suggests the emergency package put together by the European Union and the International Monetary Fund a week ago simply isn't having the desired effect.
The aim was to boost investor confidence in Greece and push the country's funding costs lower. Instead, as both of the country's bond offerings this week showed, investors remain reluctant to buy Greek debt and the yields on offer have had to rise back to levels seen even before the emergency package was put in place.
Not only is there continued concern about Greece's ability to meet the fiscal demands of France and Germany, but the working of the emergency fund itself has now come into question.
Although the EU suggested it would be the lead lender in the event of the fund being utilized, the IMF has now insisted that it will be in charge of any joint aid program, with no money from the IMF being provided to Greece under any special concessions.
This renewed concern about Greece has coincided with lower growth forecasts for Spain and Portugal from their own central banks as well as news from Dublin of a massive shortfall in the capital Irish banks need. In other words, instead of the euro-zone debt issue starting to fade, the problems could start to multiply.
For the euro, this is hardly good news.
With the IMF downgrading German growth forecasts and the chances of an early hike in euro-zone rates fading even further into the future, downward pressure on the single currency should only be growing.
Nevertheless, the euro is still showing little immediate sign of breaking out of its recent narrow trading range. Since it fell back under $1.40 early February and made a brief foray under $1.33 late March, the single currency has showed little serious momentum in either direction.
See the euro's recent trading range:
Click Image to Enlarge
With speculators already holding extreme levels of euro shorts, according to last week's data from the Chicago Mercantile Exchange, and with some technical analysts suggesting that a weekly close in the euro over $1.3450 could send it hurtling up towards $1.40 again, the single currency may yet defy its negative outlook.
For the moment, investors may well be reluctant to push the euro too far either way. Not only are currency markets distracted by end-month and end-quarter positioning, there is also the key issue of whether currencies are now being driven more by fear of risk or more by interest rate differentials.
A key test for this could emerge later this week when new U.S. non-farm payrolls are released. A strong figure, signaling the U.S. economy is now set to recover and U.S. interest rates now have room to rise, should certainly help the dollar and push the euro sharply lower if traditional yield spreads are back in play.
If not, a possible rise in confidence in the global recovery and an improvement in general sentiment could make risky markets attractive again and help the single currency to avoid a serious crash.
Early Thursday in Europe, the euro has slipped back a little as investors continue to take positions ahead of Friday's non-farm payrolls in the U.S. and the Easter holidays in most of Europe.
Bullish forecasts for a sharp improvement in payrolls are coming under pressure after Wednesday's disappointing 23,000 fall in the latest ADP private employment survey. The market had been looking for a 50,000 rise.
Elsewhere, the yen failed to get much help from the latest Bank of Japan tankan survey, in which the main diffusion index rose to -14 from -25. Instead, its path is being driven by likely outflows from Japan as the new fiscal year begins.
China also provided some good news for the global recovery with its purchasing managers' index for last month coming in up at 55.1 from 52.0.
By 0745 GMT, the euro had fallen back to $1.3487 from $1.3509 late Wednesday in New York, according to EBS. It was also down marginally at Y126.25 from Y126.28.
The dollar was also up at Y93.59 from Y93.46.
That is the question taxing players in the currency market as they watch Greek bond yields head higher again.
This rise in Greece's funding costs suggests the emergency package put together by the European Union and the International Monetary Fund a week ago simply isn't having the desired effect.
The aim was to boost investor confidence in Greece and push the country's funding costs lower. Instead, as both of the country's bond offerings this week showed, investors remain reluctant to buy Greek debt and the yields on offer have had to rise back to levels seen even before the emergency package was put in place.
Not only is there continued concern about Greece's ability to meet the fiscal demands of France and Germany, but the working of the emergency fund itself has now come into question.
Although the EU suggested it would be the lead lender in the event of the fund being utilized, the IMF has now insisted that it will be in charge of any joint aid program, with no money from the IMF being provided to Greece under any special concessions.
This renewed concern about Greece has coincided with lower growth forecasts for Spain and Portugal from their own central banks as well as news from Dublin of a massive shortfall in the capital Irish banks need. In other words, instead of the euro-zone debt issue starting to fade, the problems could start to multiply.
For the euro, this is hardly good news.
With the IMF downgrading German growth forecasts and the chances of an early hike in euro-zone rates fading even further into the future, downward pressure on the single currency should only be growing.
Nevertheless, the euro is still showing little immediate sign of breaking out of its recent narrow trading range. Since it fell back under $1.40 early February and made a brief foray under $1.33 late March, the single currency has showed little serious momentum in either direction.
See the euro's recent trading range:
Click Image to Enlarge
With speculators already holding extreme levels of euro shorts, according to last week's data from the Chicago Mercantile Exchange, and with some technical analysts suggesting that a weekly close in the euro over $1.3450 could send it hurtling up towards $1.40 again, the single currency may yet defy its negative outlook.
For the moment, investors may well be reluctant to push the euro too far either way. Not only are currency markets distracted by end-month and end-quarter positioning, there is also the key issue of whether currencies are now being driven more by fear of risk or more by interest rate differentials.
A key test for this could emerge later this week when new U.S. non-farm payrolls are released. A strong figure, signaling the U.S. economy is now set to recover and U.S. interest rates now have room to rise, should certainly help the dollar and push the euro sharply lower if traditional yield spreads are back in play.
If not, a possible rise in confidence in the global recovery and an improvement in general sentiment could make risky markets attractive again and help the single currency to avoid a serious crash.
Early Thursday in Europe, the euro has slipped back a little as investors continue to take positions ahead of Friday's non-farm payrolls in the U.S. and the Easter holidays in most of Europe.
Bullish forecasts for a sharp improvement in payrolls are coming under pressure after Wednesday's disappointing 23,000 fall in the latest ADP private employment survey. The market had been looking for a 50,000 rise.
Elsewhere, the yen failed to get much help from the latest Bank of Japan tankan survey, in which the main diffusion index rose to -14 from -25. Instead, its path is being driven by likely outflows from Japan as the new fiscal year begins.
China also provided some good news for the global recovery with its purchasing managers' index for last month coming in up at 55.1 from 52.0.
By 0745 GMT, the euro had fallen back to $1.3487 from $1.3509 late Wednesday in New York, according to EBS. It was also down marginally at Y126.25 from Y126.28.
The dollar was also up at Y93.59 from Y93.46.
- 1 April |
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