In the wake of a crucial two-day European Union summit held at the end of last week, risk appetite waned at the start of the week as investors seemed unconvinced that steps taken by EU leaders were enough to stem the sovereign debt crisis. Risk appetite was initially buoyed by a number of positive outcomes but markets soon waned as investors remained sceptical whether enough was done to tackle the crisis immediately.
At Friday’s summit, deeper economic integration and closer ties were forged among EU countries. EU nations, barring Britain, established stricter budget rules for the common currency bloc. Britain’s refusal to join the other 26 countries in a fiscal union undoubtedly left strains in the relationships between London and its EU partners.
In exchange for the UK’s support of the treaty, Prime Minister David Cameron asked for two concessions, among which was a specific protocol protecting its financial services sector, which was deemed unacceptable by other policymakers.
Among other positive news from the summit, EU countries pledged a further €200 billion in loans to the International Monetary Fund and a revised framework for the European Stability Mechanism (ESM) which will come into force by July 2012, and more significantly, its resources may be increased to above €500 billion, if needed. European Council President Herman Van Rompuy said the fiscal treaty will be finalised by March of 2012, while diplomats hope that the first draft will be ready next week. Despite a strong rally in risk sentiment following the announcement of the treaty agreement, risk aversion again took hold of financial markets at the start of this week. Also boosting risk appetite on Friday was a report that China is to set up two funds, one for Europe and the other for the US, totalling $300 billion.
The euro and higher-yielding currencies did not manage to sustain Friday’s strength and were sold aggressively throughout Monday. Forex investors appeared unsatisfied with Friday’s developments from the EU summit, and measures taken were not perceived enough to provide an imminent solution and calm investor fears. The threat of further downgrades by rating agencies was hurting the single currency.
Fitch Ratings and Moody’s said on Monday the European Union summit offered little help in ending the two-year old debt crisis. Fitch said pressure on their ratings had risen after last week’s EU summit yielded no “comprehensive” crisis solution. Moody’s said the crisis is still in a “critical” and “volatile” stage and intends to review all 27 European nations in the first quarter of 2012.
Standard & Poor’s chief economist said time was running out for the currency bloc to resolve its debt problems and might need another shock to get it moving. Meanwhile, markets were still on edge waiting for a response from S&P who had warned of a wide-scale downgrade of eurozone countries just before the summit if Europe failed to take decisive steps to end the crisis.
Among other major concerns for markets is the apparent failure by European leaders to achieve more decisive involvement by the European Central Bank. Many analysts and traders believe that an end to the crisis may only be achieved by more involvement by the ECB.
Italian and Spanish government bonds declined, as investors continued selling, and spreads widened versus the benchmark German bunds, piling the pressure on the single currency.
Italian and Spanish bond auctions, on Monday and Tuesday respectively, were still well received which provided some relief. Italy successfully sold €7 billion in one-year bills on Monday, at a slightly lower yield than the previous auction, while Spain sold €4.94 billion of 12-month and 18- month bills, exceeding the maximum target of €4.25 billion.
The euro fell to more than a two month low versus the dollar and the yen by the time of writing. The single currency also fell to a fresh nine-month low against the sterling, breaking below key technical levels. EUR/USD fell to 1.3161 by the time of writing and looked set to test October’s low of 1.3146. A break of this level would then shift the focus on the 1.3000 level.
EUR/GBP was down to 0.8442, its lowest since February 23rd of this year. Traders cited buying interest for the euro around 84.00, but a break below this level could see the pair test 83.50 or even 2011 lows at 0.8285 hit in early January.
Upcoming FX key events:
Today: Swiss SNB Interest Rate Decision, EZ HICP & Flash PMI.
Tomorrow: US CPI.
FX technical key points:
EUR/USD is bearish, target 1.3000, key reversal point 1.3850.
EUR/GBP is bearish, target 83.50, key reversal point 86.40.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5125, key reversal point 1.6170.
USD/CHF is neutral.
AUD/USD is bearish, target 0.9600, key reversal point 1.0745.
NZD/USD is bearish, target 0.7300, key reversal point 0.8239.
Please feel free to send any comments or feedback regarding our articles on trading@rtfx.com.
RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.
This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.
They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.
www.rtfx.com
Mr Xuereb is a trader at RTFX Ltd.