Not that we’re completely surprised (nothing fazes us anymore anyways!), but the euro took an unexpected downturn- well, unexpected by most. Last week started off very rocky for the currency, but it really firmed up by mid-week and closed with pride as it reached new session highs. The reason for the spike was increased trader confidence after officials pledged to rescue the euro zone from its debt crisis. As we reported yesterday, the currency had a really good outlook before this week’s opening, but after just one day of trading this week, the euro is now on a big decline.
The euro fell on Monday, hitting a record low against the Australian dollar, on worries the European Central Bank may disappoint investors hoping for more actions to contain the debt crisis.
Expectations for the ECB, which holds its policy meeting on Thursday, have grown sharply after President Mario Draghi said last week the bank would do whatever it takes to save th e euro, a message echoed by German Chancellor Angela Merkel and French President Francois Hollande.
Some in the mark et speculated the ECB may reactivate its bond-buying program to help r educe Spanish and Italian borrowing costs, but many were skeptical because Germany has repeated its opposition to such a step.
There are probably quite a few experts out there smugly saying ‘I told you so!’ in their minds as they read the news about euro’s beginning to this week. Some of them were still holding on to the notion that the spike of the euro mid-week last week would be temporary, and it looks as though they may have been right- for now at least. The euro took such a knock that it hit a record low against the Aussie dollar on Monday as traders start to grow extremely skeptical about expectations over policies from the ECB.
“Traders were in a ‘show me’ mode with enthusiasm fading over last week’s comments by both Mario Draghi and Angela Merkel in support of the euro,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management i n New York.
German Economy Minister Philipp Roesler warned the ECB about any large-scale government bond purchases and a German government spokesman on Monday reiterated Berlin’s opposition to any form of mutualisation of euro zone debt.
The euro fell 0.6 percent to $1.2241, retreating from a three-week high of $1.2389 hit on Friday but holding above a two-year low of $1.2040 hit Tuesday, according to Reuters data.
Adding to bearish sentiment was the euro’s failure to close above a key technical level near $1.2325 on Friday.
Still, near-term losses in the euro could be limited as traders were unlikely to place large bets ahead of the ECB meeting, analysts said.
“Clearly, if nothing is announced that would be a massive disappointment,” said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore. “But there is an expectation that we’re going to see something meaningful on Thursday.”
Analysts said the ECB might instead explore new policy tools such as outright asset purchases, or quantitative easing, something its peers in Britain, the United States and Japan are already using to stimulate growth.
There have also been recent suggestions it could empower national central banks to broaden their asset buying abilities.
So, the euro isn’t doing so well because the confidence in the ECB to actually come to a solution is quickly fading. Large bets before the meeting of the European Central Bank are not likely to happen. If nothing is accomplished and no policies are concreted, it would be beyond devastating to the value of the currency. So, not faring well ahead of meeting of the ECB isn’t the worst thing that could be happening. Hopefully, promise of a resolution to save the euro zone wasn’t just all talk.
Markets will keep an eye on any comments from U.S. Treasury Secretary Timothy Geithner, who is due to discuss the U.S., European and global economies with German Finance Minister Wolfgang Schaeuble and Draghi on Monday.
Markets were bracing for a busy week, with central bank decisions due in the United States and the UK as well as the euro zone, in addition to key U.S. jobs data on Friday.
The euro fell 0.9 percent to 95.80 yen, though it remained above last week’s low of 94.09 yen, its lowest level against the Japanese currency in more than 11-1/2 years.
It also struggled against the Swedish crown, which hit a 12-year high after data showed the Swedish economy grew much more than expected in the second quarter. The euro fell 1.5 percent to 8.3370 crowns.
The Australian dollar rallied, reaching a record high of around A$1.1652 against the euro and a four-month high of $1.0499 versus the U.S. dollar.
Many market players said the Australian currency’s gains could be vulnerable however, given its close correlation with the global growth outlook.
“People are selling euro/Aussie and that provides Aussie/dollar with an indirect degree of support. But exposure there is pretty big if we get any negative economic developments in Asia and if Draghi and (Federal Reserve Chairman Ben) Bernanke do not deliver,” said Daragh Maher, FX strategist at HSBC.
“Our view is we would sell Aussie on any firm break above $1.0500.”
The Federal Reserve begins a policy meeting on Tuesday and its decision will be announced on Wednesday, but economists expect policymakers to sit on their hands for now.
The dollar was steady at 82.786 against a basket of major currencies, rebounding from a three-week low of 82.343 on Friday. Against the yen, the dollar eased 0.3 percent to 78.18 yen.
In conclusion, this is going to be a busy week in the forex market- if nothing else. It could be a week full of rollercoaster news, so brace yourself!
What do you think is going to happen in the market for the rest of the week?