Euro relief, but will it last?
The European Central Bank (ECB) decision to embark on outright monetary transactions helped to provide a major lift to markets but did not spur the EUR onto major greater gains. The program of conditional albeit unlimited bond purchases was much anticipated and well received (except by the German Bundesbank) despite many of the details being leaked in advance. The lack of EUR reaction in part reflected this.
In fact, the EUR appeared to rally more in the wake of aggressive buying of EUR/CHF, which finally moved away from its 1.2000 floor, possibly with some official help. Markets will now await the decisions of Spain and Italy which would have to formally request aid for the bond buying plan to be put into action and perhaps there will be some hesitation on the part of the EUR to push higher.
Although there could be some nervousness ahead of the decision by the German constitutional court on the ESM permanent bailout fund and Dutch elections on 12 September the ECB’s move has provided a floor under risks assets over the short term. Given the EUR’s strong relationship with peripheral Eurozone bond yields, the implication is that the drop in the yields will provide some support for the EUR.
Before everyone becomes too excited it should be noted that there is still a long way to go before the Eurozone crisis will be resolved given the many structural and growth issues that need to be overcome. Nonetheless, the downside risks for the EUR are clearly diminishing, leaving the currency in better shape than it has been for a long while.
The fact that EUR/USD is back above its 100-day moving average is a positive signal. Moreover, despite some short covering the market is still very short EUR. However, we would be cautious about becoming overly bullish. Further gains in the EUR will be difficult to achieve given the constant drag on the currency due to relatively weaker growth and the simple fact that many of the underlying issues in the Eurozone remain unresolved.
About Mitul Kotecha
I have worked in the financial industry as a strategist/economist for over 16-years in several corporate and investment banks in London.
I have covered a range of financial products including bonds, interest rates, equities and foreign exchange.
I am currently working in Hong Kong for Crédit Agricole Corporate & Investment Bank, where I am the head of global currency strategy, in charge of a team of analysts providing research and strategy for the bank’s clients and internal trading and sales teams.
I hold an honours degree in economics and a masters degree in economics and finance and have developed a comprehensive knowledge of economic and financial theory during my studies and in my employment.
I am regularly consulted by the press/media for my views on markets and economies appearing regularly on business channels such as CNBC, Bloomberg TV, Channel News Asia, and Reuters TV. I am also regularly quoted in various newspapers including the Financial Times and Wall St. Journal as well as various newswires including Reuters, Bloomberg, Associated Press, Dow Jones and many others.