Comments about the euro zone have changed the pace for the euro, once against. After record setting lows, the European currency is on the rise, 
but many are wondering how long it will last- experts say it won’t last very long at all…
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The euro rallied broadly on Wednesday, recovering from a two-year low against the dollar after a European Central Bank policymaker said he could see grounds for giving the euro zone bailout fund a banking license.
The comments from Ewald Nowotny prompted a flurry of short-covering as the euro jumped higher, with some investors who had earlier bet against the single currency being squeezed out of those positions.
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What we see going on here:
After a two week slum and two year record setting low against the U.S. dollar, the euro is making a little ground. This pattern is continuing from the beginning of the week. The reason for this notable jump on Wednesday is the policymaker at the ECB (European Central Bank) started talking about his plans for a bailout fund banking license in the euro zone.
It’s not unheard of that even just talk from the right officials causes the market to go one way or another- usually, the moves after comments like this are actually pretty extreme. Do you recall the impact comments from German’s Chancellor Merkel had on the euro? That was pretty much the opposite effect where it send the set the euro into a downward spiral.
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The euro hit a session high of $1.21705, up 0.9 percent on the day.
But many analysts said the move was overdone and predicted further weakness ahead.
A break below support at the psychologically important level of $1.20 would open up a test of the 2010 low of $1.1876.
“It’s negativity fatigue. The market was caught short by the comments ….and Asian stops got triggered,” said Steve Gallo, currency strategist at Credit Agricole, referring to stop loss buy orders in euro/dollar.
A banking licence would give the European Stability Mechanism more firepower to fight the debt crisis but analysts said the market may have put too much emphasis on the comments, given ECB opposition to date, and investors would likely sell into the euro’s rally
“The market is desperate and jumping on anything that even looks remotely positive,” said Geoff Kendrick, currency strategist at Nomura.
The euro recovered from a two-year low of $1.2042 hit on trading platform EBS on Tuesday when some EU officials said Greece was unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary.
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So Basically…
The euro hit a high, sure, but traders should enjoy it while it lasts because experts predict this won’t go on for long. Analysts think that traders overdid it and traded too much too soon on the euro. Experts are saying that people are just happy to have a glimmer of hope and are jumping on any positivity they can get.
If the banking license does push through, it would be beneficial in fighting the current debt crisis in the euro zone.
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But the outlook remained deeply negative given spiraling Spanish borrowing costs that have fueled concerns the country will need a full sovereign bailout.
A worse-than-expected German business climate index ate into some of the single currency’s gains, adding to concerns activity in the euro zone’s largest economy is slowing down.
Adding to concerns, the European Central Bank’s latest lending survey found banks made it harder for firms to borrow in the second quarter and expected to see a slump in demand as the euro zone debt crisis deepened.
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Our Thoughts:
Even though the euro is trading at a session high, the outlook still does not favor the area’s comeback. Spain is still a major drag and the borrowing costs are just further proof that the country is going to need a sovereign bailout to stay afloat.
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Spain paid the second-highest yield on short-term debt since the birth of the euro at an auction of three- and six-month bills on Tuesday, indicating difficulties in future debt sales.
Yields on Spanish debt have jumped since last week when the region of Valencia said it would need financial help from Madrid, with investors concerned other indebted regions will also seek aid.
Delivering yet more bad news for Europe, Moody’s changed the outlook on its provisional top-notch rating for the European Financial Stability Facility to negative.
The action was expected given its move earlier in the week to put a negative outlook on Germany, the Netherlands and Luxembourg.
Despite the bleak outlook, the euro’s respite against the dollar also pushed it higher against other currencies.
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Spain is up the creek without a paddle…
Spain is without a doubt in a major economic crisis. Their yield on short term debt is the highest it has been since the start of the euro. Even since poor progress last week, yields have jumped as a result of Valencia seeking financial aid from Madrid. The area also got an outlook revision when officials revealed that this situation is going to roll into next year, at the very least.
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Against the yen, it rose to 95.13 yen after having carved out a new 12-year low of around 94.12 yen earlier in the week. Traders in Tokyo cited talk of a euro/yen option barrier at 94.00 and stop-loss offers under the level.
The Australian dollar retreated from a recent record high against the euro, trading at A$1.1817 from a peak of A$1.1690 on Monday.
The Australian currency also gained against the U.S. dollar after Nowotny’s comments fanned demand for perceived riskier currencies, climbing 0.6 percent to US$1.0289.
The dollar index dipped 0.4 percent to 83.641, off the previous day’s two-year high of 84.10.
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