The Euro gained a whopping 2.3% in the last week and held near its three-week high on Friday. This is the second successive rise in the currency against the US Dollar Index (DX). The Euro held near $1.24 as investors shed short positions and after high demand for Spanish government bond auction on Thursday which eased concerns about Spain's debt-servicing abilities. Risk appetite re-emerged in the financial markets after the Spanish bond sale and led to demand for higher-yielding and riskier investment assets. Spain sold 3 billion Euros ($3.7 billion) of 10-year debt on 17th June at an average yield of 4.86 percent, less than the 5.04 percent that the bonds traded at before the sale.
Demand for the bonds was 1.89 times the amount on offer. It also sold 479.2 million Euros of 30-year debt at 5.908 percent and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on 18th March. Positive sentiments also emerged after European leaders agreed to publish details of stress tests which will show the financial health of big banks next month. This helped to restore confidence in the Euro Zone and led to some support to the currency which has declined 13.5% against the DX on a year-to-date basis.
Debt concerns in the Euro Zone have eased but have not vanished. Markets are currently taking support from expected hopes of improvement in the Euro Zone scenario. Strength in the currency is mainly backed by these and may not be sustainable in the coming weeks. Greece's credit rating has been downgraded to "junk" status and this in itself indicates that the economic scenario is still bleak. Ongoing austerity measures in the European countries are not likely to reduce budget deficits immediately. Moreover, the impact of the $1 trillion rescue package to the European countries is still to be seen. Long-term negative impact of the European debt crisis is feared in the US, China and other European nations. Hence, the positive trend in the Euro may not continue for long as the fundamentals still remain weak.
Euro Zone economic data in the last week
• Industrial production in the Euro Zone increased by 0.8% in April. Industrial output increased for eleventh consecutive month in April.
• The German ZEW economic sentiment declined much more than expected in June. The economic sentiment index declined to 28.7 as against the previous figures of 45.8 in the earlier month.
• Consumer prices remained unchanged to 1.6% in the last month.
• Spain was successful in selling its 10-year bonds to the tune of 3 billion Euros ($3.71 billion) at a lower yield.
• The European Union has decided to publish results of the stress tests conducted on the region's lenders. This will lead to more transparency.
• Moody's Investors Service lowers Greece's credit rating to "junk" status.
• French government announced yesterday that it would raise the retirement age and increase income taxes on the rich to help rein in its budget deficit.
Fundamental Outlook
The debt crisis in the Euro Zone is not expected to have an immediate solution. But concerns over the debt crisis has eased and led to recovery in demand for the currency which lost sharply since the beginning of 2010. Short-term strength in the Euro is expected to remain on the back of expectations that the situation in the ailing European nations will improve. But, we expect worries on the Euro Zone front to re-emerge sooner rather than later. In the coming week, we expect the Euro to trade with a positive bias in the range of 1.2190 - 1.2600.
No comments:
Post a Comment