Risk appetite opened the week on a sour footing as the situation in Spain seemed to be worsening and the European debt crisis deepening. Reports on Friday that Valencia, Spain’s highly indebted state, was about to ask for assistance from the central government to help repay its debt, pushed the euro lower across the board as Spanish borrowing costs consolidated above seven per cent.
Investor appetite for risk is expected to take further blows- Emman Xuereb
On Monday, peripheral bond yields continued to rise and the Spanish 10-year bond yield hit a fresh euro-era peak above 7.5 per cent, as reports suggested that more regions beyond Valencia may need to request financial assistance. Madrid has so far dismissed any suggestions that they will need a full EU/IMF financial bailout, but has intensified calls to the European Central Bank to increase its efforts to stabilise financial markets.
EUR/USD fell to a two-year low on Monday, by 1.2067 as Spain’s borrowing costs surged. The single currency plummeted across the board and hit historical lows versus its major peers such as the Aussie and the Canadian dollar, and to more than a decade low against the Japanese yen. EUR/JPY hit a 12-year low by 94.24 as forex investors fled to safe-haven assets such as the Japanese currency. EUR/CAD and EUR/AUD fell to record lows of 1.2280 and 1.1699 respectively, before bouncing back slightly on profit taking.
Greece was also back in the headlines at the beginning of the week as the Troika resumed its mission to evaluate Athens’ progress in implementing its austerity programme. Discussions between international lenders and Greek officials will be vital in determining whether Greece will receive its next tranche of aid. The potential for pessimistic headlines kept investors on edge, as already before the meetings a number of reports and suggestions helped pile additional pressure.
First, German Vice Chancellor Philipp Roesler saying Greece could no longer receive more aid if it missed its budget targets, adding that a Greek euro exit has lost its fear factor. Secondly, press reports, which were later denied by the IMF, suggested that the Fund had told the European Commission that it can no longer provide funding for Greece.
On Tuesday, sentiment remained weak as rating agency Moody’s lowered its outlook on Germany, Holland and Luxembourg’s AAA rating to negative. The announcement by Moody’s came just after the close of US markets and cited “rising uncertainty” over Europe’s debt crisis. Risk appetite and the common currency received a brief lift overnight on Tuesday after data showed that China’s manufacturing activity grew at its fastest pace in nine months. EUR/USD rose to a session high by 1.2238 shortly after the Chinese data but could not hold on to its gains going in to the European session.
At the start of the European session on Tuesday, data from Europe’s largest economies and the euro area showed manufacturing activity slowed sharply and fuelled concerns over global growth. Flash manufacturing purchasing managers’ surveys from Germany, France and the euro zone slipped lower than expected. The German manufacturing sector slid to 43.3 in July, its deepest contraction in three years from June’s final reading of 45.0, and suggested that Europe’s largest economy may shrink in the third quarter as it feels the heat from the region’s crisis.
Equity markets in Europe reversed their initial gains and traded in the red by the time of writing. EUR/USD dipped to 1.2084 on Tuesday, within sight of its two-year low, hit the previous day. If we stay below 1.2150, downside pressure could prevail with June 2010 low by 1.1876 as the next significant target. EUR/JPY also hovered close to its 12-year trough on Tuesday, hitting a low by 94.44, while EUR/AUD and EUR/CAD had trimmed most of the previous day’s gains and edged closer to their recent lows.
Ahead tomorrow is GDP data from the United States which should give further indication about the impact the European sovereign crisis is having on the world’s largest economy. Investor appetite for risk is expected to take further blows, if the initial forecasts showing slower growth are confirmed. Poor US growth figures may provide a breather to the single currency against the greenback, as focus may shift on future Federal Reserve policy in the short to medium term. However, the spectrum of more easing by the Fed may not be enough to lift the single currency against its riskier peers.
Upcoming FX key events
Today: US durable goods orders and US pending home sales.
Tomorrow: US GDP, US PCE and US Michigan consumer sentiment.
Technical key points:
EUR/USD is bearish, target 1.2000, key reversal point 1.2800.
EUR/GBP is bearish, target 0.7650 key reversal point 0.81.
USD/JPY is bearish, target 77.00, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.