As this rollercoster of a month- and year for that matter, continue, the Euro is back on the downturn after a strong start to the week. The yields on the Spanish and Italian ten year bonds are reaching that ‘danger zone’ we’ve been talking about for the past few weeks, and the market is responding the Euro in a negative way at this end to the week. It looks like that rise in the foreign market at the beginning of the week was only a fluke, or hiccups, but things are starting to look as grim as they actually are.
FOREX-Rising Spanish and Italian yields push euro lower
Thu Jun 14, 2012 6:36am EDT
* Euro pares gains as Spanish borrowing costs rise
* Italy sells three-year debt at 6-mth high of 5.3 pct
* Investors wary ahead of Greek election on Sunday
By Anirban Nag
LONDON, June 14 (Reuters) – The euro slipped against the dollar on Thursday as Spanish and Italian bond yields surged, highlighting the risk of euro zone contagion ahead of Sunday’s elections in Greece that could lead to the country tumbling out of the common currency.
The euro’s outlook may stay bearish after benchmark 10-year Spanish government bond yields hitting 7 percent on Thursday – a level where fellow euro zone members such as Greece and Ireland had to seek international bailouts as it is seen as too expensive in the long term.
The aid deal put together for Spanish banks at the weekend has signally failed to calm the markets, with Italian three-year borrowing costs spiking to 5.30 percent at an auction on Thursday.
The common currency fell to a session low $1.2542 on trading platform EBS, turning lower on the day and off the day’s high of $1.25894. It was last trading at $1.2560 with large option expiries cited at $1.2500 which could curtail losses for the time being.
“Spanish yields are creeping up, which clearly indicates that the bank bailout deal will not change anything and they are dragging Italian yields higher,” said Stuart Frost, head of Absolute Returns and Currency at fund manager RWC Partners.
“For the euro/dollar, all this means it is on a slippery slope down.”
Earlier, the common currency took Moody’s downgrade of Spanish government debt to one notch above junk status in its stride.
Many analysts said the euro was likely to trade between $1.24 and $1.27 ahead of Sunday’s Greek vote, with investors either reluctant to build fresh short positions or squaring positions given uncertainty over the election outcome.
Speculators have added to very large bearish bets against the euro in the past few weeks, leaving scope to the euro to stage a short-covering rally if parties supporting austerity and reforms in Greece win at the weekend.
Right now, it is too close to call and a victory for the far-left SYRIZA, which opposes the austerity measures on which Greece’s bailout deals are based, would intensify fears of a potential euro zone break-up, and likely push the currency towards recent two-year lows around $1.2280.
A sharp rise in yields on German Bunds, viewed as the euro zone’s safest asset, has also raised concerns that the cost of the debt crisis is growing for Germany, the bloc’s paymaster.
“The fact that Bunds were sold for two days in a row is deeply disturbing,” said Daisuke Uno, chief strategist at SMBC. “Investors may be starting to cut exposure to the entire euro area. And if you look at what’s happening in Europe, it’s hard to think they won’t do that.”
SNB REITERATES FRANC CAP
The Swiss franc rose against the euro after the SNB said it was prepared to buy unlimited amounts to defend the 1.20 level. The euro fell to 1.2008 francs on trading platform EBS, from around 1.20196 before the announcement.
Traders said the SNB has been buying lots of euros in recent weeks, stepping up its defence of the cap ahead of the Greek election, which could fuel demand for the safe-haven franc. SNB President Thomas Jordan hinted that capital controls could be introduced if the situation in the euro zone deteriorates and puts more upward pressure on the franc.
“Clearly the SNB is trying to downplay the franc’s attractiveness and buy more time. We expect further pressure on the euro/Swiss franc ‘floor’ in the coming days, especially considering the Greek elections,” said Peter Rosenstreich, chief FX analyst at Swissquote Bank, in a note.
Against the yen, the euro eased 0.1 percent to 99.55 , off an overnight peak around 100.11, with Japanese exporters’ bids lined up above 100 yen. The dollar fetched 79.39 yen, off Monday’s high of 79.92 yen.
The New Zealand dollar was up 0.3 percent on the day at US$0.7768, paring gains from Wednesday, when it hit a one-month high of $0.7808.
The kiwi lost a few pips after the Reserve Bank of New Zealand said a weak economy and an uncertain global outlook meant rates need to stay at record lows. As expected, the RBNZ kept rates unchanged at 2.5 percent for a 10th straight meeting.
On Thursday, the Euro fell against the dollar- not unexpectedly, most experts saw this coming at least as early as the closing of last week. The Spanish and Italian bonds saw even higher yields, pushing the Euro down and making the risk of the euro zone undeniable. Just ahead of the nail biting elections in Greece on Sunday, experts worry the elections will push the country out of the common currency and weaken the Euro even more.
The outlook is not good for Spanish banks as the bonds finally hit that dreaded 7 percent market. Reaching this level means the country will face strong opposition when it comes to receiving bailout funds as countries such as Ireland and Greece have already pledged not to lend to a country who has risen above the 7 percent market in bonds. This means that the proposed aid deal for Spain is significantly weaker than ever before. The Italian markets didn’t bring much hope either with barrowing rates spiking to 5.30 percent on Thursday.
Very large bearish bets against the Euro by speculators have only hurt the situation- making it a very slippery slope at this point.
As of now, the Greek elections are too close to call. Neck in neck are parties of very different positions on the bailout policies.
The start of next week for the Euro is almost impossible to predict at this point.
Do you have any thoughts about the impact this weekend’s Greek elections will have on the European economy? Tell us what you think is going to happen by Monday.