A Sharp Reversal Is On Its Way. By Nicholas Hastings
As storm clouds gather over Europe, expect a sharp reversal of recent currency flows.
The euro will come under even more severe selling pressure than it has in recent months and the large gains in higher-risk commodity and emerging-market currencies will soon be lost.
See how much the euro has already fallen since the start of the year:
Click Image to Enlarge
The dollar and the yen, which have served as the safe havens of choice during the recent global crisis, will once again benefit.
How far and how fast these currency moves will come will depend very much on the ability of euro-zone politicians to dispel market fears.
At the moment, the general feeling is that the euro--and the euro zone--are staring into the abyss.
Past efforts to provide a safety net for Greece and its debt problems have proved inadequate. Greek banks are now facing a capital flight that could push them under. And, instead of Greece paying less to service its overseas debt, the country's funding costs are rising to the highest levels since the euro was launched over a decade ago.
This week, Greece only made matters worse for itself by reportedly calling into question the role of the International Monetary Fund in the rescue package put together by European Union leaders only a couple of weeks ago.
This not only focused the market's attention on Greece's reluctance to adopt any nasty IMF austerity measures but also put the spotlight on the constitutional battles that Germany continues to face in its efforts to prevent a Greek default.
Some experts reckon that Germany may now have gone as far as it can without compromising the fiscal disciplines that are required to ensure the future of the euro.
However, resolving Greek funding isn't the only problem.
Slow growth in the euro zone as a whole--as confirmed by revised estimates showing GDP in the fourth quarter of last year remained flat--mean that other euro-zone debtors, Spain, Portugal and Italy, will have an even rougher ride reducing their debt mountains.
As the risk of a downgrade in their credit ratings rises, chances are that these countries' yield spreads and the price of insuring their debt will start to take off too.
Fears of this contagion are already haunting the European Central Bank. As the bank confirmed Thursday, it will continue to accept lower-rated collateral debt from Greek banks to help ease the funding crisis for now.
But investors are now looking for the ECB to start sacrificing its natural hawkish stance and keep its monetary policy easy for even longer than anticipated.
For the euro, this is hardly good news.
Apart from anything else, it means that the single currency's central bank won't be in a position to help it with higher interest rates if its comes under even more intense selling pressure.
Steve Barrow, senior currency strategist with Standard Bank in London, put it like this: "There's no penal rates to be paid for shorting the euro and, in our view, little chance of a dramatic euro rally in the same way as we might have seen for the likes of the [Greek] drachma or [Spanish] peseta in the past if policymakers managed to rebuff devaluation pressure."
Little surprise that Barrow is looking for a euro down at $1.25.
However, there is also the wider implication of the latest twist in the Greek crisis, which comes at a time when speculation over a Chinese yuan revaluation is rising and when the U.S. Federal Reserve chairman appears keen to play down overenthusiam for the U.S. recovery.
This could well accelerate the move back into safe havens, with investors pulling out of the commodity and emerging-market currencies that have rallied sharply in recent months on the promise of the global recovery.
Simon Smollett, senior foreign exchange options strategist with Credit Agricole Corporate and Investment Bank, warned that these currencies may now be "on dangerous ground with their increasingly bubble-like appearance."
If so, it won't be just the euro heading sharply lower. There could be a much more general retreat among high-yielders as investor confidence in the euro zone and the global recovery as a whole gets knocked again.
Recent tensions over Greece subsided early Friday in Europe after The country reported a sharp decline in its first quarter deficit and European Central Bank President Jean-Claude Trichet attempted to inject fresh confidence in the European Union rescue package for the country.
A rebound in global stock markets also helped to boost general market sentiment and encourage investors back into risk taking, with the Dow Jones Industrial Average and the Nikkei Index both gaining 0.3%.
By 0745 GMT, the euro was up at $1.3369 from $1.3349 late on Thursday in New York, according to EBS. The single currency was also up at Y125.43 from Y124.63 while the dollar rose to Y93.67 from Y93.37.
The euro will come under even more severe selling pressure than it has in recent months and the large gains in higher-risk commodity and emerging-market currencies will soon be lost.
See how much the euro has already fallen since the start of the year:
Click Image to Enlarge
The dollar and the yen, which have served as the safe havens of choice during the recent global crisis, will once again benefit.
How far and how fast these currency moves will come will depend very much on the ability of euro-zone politicians to dispel market fears.
At the moment, the general feeling is that the euro--and the euro zone--are staring into the abyss.
Past efforts to provide a safety net for Greece and its debt problems have proved inadequate. Greek banks are now facing a capital flight that could push them under. And, instead of Greece paying less to service its overseas debt, the country's funding costs are rising to the highest levels since the euro was launched over a decade ago.
This week, Greece only made matters worse for itself by reportedly calling into question the role of the International Monetary Fund in the rescue package put together by European Union leaders only a couple of weeks ago.
This not only focused the market's attention on Greece's reluctance to adopt any nasty IMF austerity measures but also put the spotlight on the constitutional battles that Germany continues to face in its efforts to prevent a Greek default.
Some experts reckon that Germany may now have gone as far as it can without compromising the fiscal disciplines that are required to ensure the future of the euro.
However, resolving Greek funding isn't the only problem.
Slow growth in the euro zone as a whole--as confirmed by revised estimates showing GDP in the fourth quarter of last year remained flat--mean that other euro-zone debtors, Spain, Portugal and Italy, will have an even rougher ride reducing their debt mountains.
As the risk of a downgrade in their credit ratings rises, chances are that these countries' yield spreads and the price of insuring their debt will start to take off too.
Fears of this contagion are already haunting the European Central Bank. As the bank confirmed Thursday, it will continue to accept lower-rated collateral debt from Greek banks to help ease the funding crisis for now.
But investors are now looking for the ECB to start sacrificing its natural hawkish stance and keep its monetary policy easy for even longer than anticipated.
For the euro, this is hardly good news.
Apart from anything else, it means that the single currency's central bank won't be in a position to help it with higher interest rates if its comes under even more intense selling pressure.
Steve Barrow, senior currency strategist with Standard Bank in London, put it like this: "There's no penal rates to be paid for shorting the euro and, in our view, little chance of a dramatic euro rally in the same way as we might have seen for the likes of the [Greek] drachma or [Spanish] peseta in the past if policymakers managed to rebuff devaluation pressure."
Little surprise that Barrow is looking for a euro down at $1.25.
However, there is also the wider implication of the latest twist in the Greek crisis, which comes at a time when speculation over a Chinese yuan revaluation is rising and when the U.S. Federal Reserve chairman appears keen to play down overenthusiam for the U.S. recovery.
This could well accelerate the move back into safe havens, with investors pulling out of the commodity and emerging-market currencies that have rallied sharply in recent months on the promise of the global recovery.
Simon Smollett, senior foreign exchange options strategist with Credit Agricole Corporate and Investment Bank, warned that these currencies may now be "on dangerous ground with their increasingly bubble-like appearance."
If so, it won't be just the euro heading sharply lower. There could be a much more general retreat among high-yielders as investor confidence in the euro zone and the global recovery as a whole gets knocked again.
Recent tensions over Greece subsided early Friday in Europe after The country reported a sharp decline in its first quarter deficit and European Central Bank President Jean-Claude Trichet attempted to inject fresh confidence in the European Union rescue package for the country.
A rebound in global stock markets also helped to boost general market sentiment and encourage investors back into risk taking, with the Dow Jones Industrial Average and the Nikkei Index both gaining 0.3%.
By 0745 GMT, the euro was up at $1.3369 from $1.3349 late on Thursday in New York, according to EBS. The single currency was also up at Y125.43 from Y124.63 while the dollar rose to Y93.67 from Y93.37.
- 9 April |
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