FX Traders Watching EU Yields

Filed in currencies, Debt, euro, Gold, Quantitative Easing, swiss franc, Yen by on September 30, 2010 0 Comments

The EURUSD has stayed surprisingly resilient despite the negative news surrounding the Euro in the last 24 hours. Moody’s downgraded Spain to Aa1 with the outlook at stable which did not provide much of a reaction. EU Commission President Barroso & German Chancellor Merkel’s strongly worded comments yesterday are still ringing in our ears which suggested that there are still significant risks in the Eurozone. Today’s heightened CDS pricing and widened yield spreads confirm this (although we are seeing some relief today due to a canceled Irish auctions catching dealers short). “We will pull the handbrake before the car rolls down the hill” Barroso proclaimed. He then proceeded to outline sanctions for countries which failed to follow the EU’s rules on deficit and public debt. Under the new program and under the blanket of the Stability & Growth Pact, member nations whose deficit climb above 3.0% and public debt larger than 60% of GDP could be made to cough up an additional 0.2% of GDP in interest bearing deposits. He went on the say that this new plan was “the biggest step forward on economic governance since the Stability and Growth Pact was introduced.” The step toward greater economic coordination among member states clearly unnerved Germany. Merkel was quick to respond that the EU’s proposal should be an “automatic” alarm that a “depoliticized” process was needed. In addition, she called for a change in the EU’s treaty which includes the suspension of voting rights for certain states and reiterated that Germany would not support any extension of Eurozone safely measures. Today German Finance Minister Wolfgang Schaeuble asserted that Germany “needs a broader sanctions mechanism to get the moral hazard problem in the Eurozone under control.” With prospects of decent growth in the peripherals and concerns about political backtracking on austerity measures, we don’t see a smooth exit from the current situation; in fact we see the Eurozone crisis is sliding deeper, albeit slowly. Ireland’s Central Bank announced today the much anticipated solution surrounding Anglo Irish Bank – the bank is now state owned. A total of € 29.3 billion (bn) in state raised capital would be needed and an additional €5 bn may potentially be needed should economic conditions deteriorate further. In a politely worded statement, the Irish Finance Minister foretold that the holders of subordinate debt would have to make large contributions to the bailout – translated into American English, this simply means they are about to take on some heavy losses. In Australia, economic data came in softer than expected. Building approvals fell -4.7% m/m vs. 0.0 expected while private lending growth rose to a weak 0.1% vs. 0.3% expected. Given the recent moderation in economic data and current macro landscape, we suspect that the RBA will hold off on reinstating their hiking cycle until at least November. Despite the short lived sell off in AUDUSD, we suspect that safe haven investors will continue to value Australia’s strong fundamental & conservative fiscal position – this in turn will keep the currency supported. For the Greenback, concerns over the potential size…

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FX Traders Watching EU Yields

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