The rally in risk assets faded at the start of the week as concern over the global economic outlook resurfaced and expectations for sour Q3 corporate earnings weighed on sentiment. At the end of last week, risk appetite was buoyed by ECB President Mario Draghi ’s comments and by a surprise drop in the US’s unemployment rate. Sentiment was also lifted by strong demand at a Spanish bond auction and the Fed’s minutes from its last FOMC meeting.
The euro pulled further away from its recent highs against the dollar- Emman Xuereb
At last week’s Governing Council meeting, the European Central Bank decided to leave its benchmark rate unchanged at 0.75 per cent and did not signal any future rate cut. Despite some expectations or hopes for a rate cut, the single currency still found support from President Draghi’s comments in the post-meeting news conference. Draghi again reiterated that the euro was “irreversible” and that the Outright Monetary Transactions programme had managed to ease tensions on the debt market. He outlined more details about the new OMT programme and stressed the importance of “conditionality” being attached to the programme.
EUR/USD rose to above 1.3000 after Draghi’s comments and extended gains to 1.3032 after the Fed ’s minutes released later in the day. It reached a two-week high by 1.3072 on Friday, after the US jobs report showed employers had added 114,000 jobs in September (consensus at 115,000), while unemployment fell to a four-year low at 7.8 per cent. This was the lowest the jobless rate has been since Barack Obama took office. Risk appetite soared after the employment numbers and higher-yielding currencies rallied across the board.
Risk sentiment weakened at the beginning of the week and the fate of the euro was closely linked to uncertainty stemming from Spain’s indecision about seeking financial aid. Fresh concerns over Greece also weighed on investor sentiment. A Eurogroup meeting on Monday did not result in any significant progress regarding the situations in Spain and Greece. At the meeting of eurozone finance ministers, Eurogroup chief Juncker formally announced the inauguration of the European Stability Mechanism. The newly-appointed managing director of the €500 billion fund noted that while the EFSF will continue to fund the remaining parts of the current bailouts, the Spanish bank bailout will be funded by the ESM.
Finance ministers and the International Monetary Fund held “thorough and robust” discussions over the situation in Greece, but failed to make significant headway on how to get Athens back on track with its bailout programme. Juncker and IMF managing director Christine Lagarde said they were pleased with Greece’s progress, but stressed that more needs to be done and that further discussions would take place when the troika publishes its report next month.
Meanwhile on Tuesday, German Chancellor Angela Merkel visited Athens personally to assess the situation first hand, although no announcement on whether Greece will receive its next aid tranche is expected until the troika finishes its quarterly review.
Spain was the other main focal point of discussions. Finance ministers said that Spain did not need a bailout, at least for now. Spain poses the greatest source of contagion risk at the moment. Nations from the euro area had already set aside €100 billion for Madrid to recapitalise its banks, of which €40 billion are expected to be used in the coming weeks, but financial markets are widely expecting a full aid request.
German Finance Minister Wolfgang Schaeuble on his arrival at the summit reiterated that Spain does not need financial aid, a message that was confirmed by other Europ-ean ministers.
This continued to pile up uncertainty over a Spanish bailout request, which would trigger the new OMT program. However, Prime Minister Mariano Rajoy has said he may have to request help if Spanish borrowing costs remain too high for too long.
On Tuesday, the euro pulled further away from its recent highs against the dollar as uncertainty grew in the wake of the Eurogroup summit. Finance ministers from all 27 countries of the European Union met in Luxembourg on Tuesday, while President Draghi spoke to an EU parliamentary committee. EUR/USD fell to 1.2907 but losses were seen limited after the People’s Bank of China became the latest to add more stimulus to support ailing growth, which was likely to boost demand for the single currency and higher-yielding currencies at lower levels.
Upcoming FX key events:
Today: German CPI and US International trade.
Tomorrow: US PPI and US Michigan sentiment preliminary.
Technical key points:
EUR/USD is bullish, target 1.3350, key reversal point 1.2550.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bullish, target 1.6400, key reversal point 1.5750.
USD/CHF is bullish, target 1.00, key reversal point 0.91.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.