This is the week of reckoning for the EUR along with a few central bank decisions thrown into the mix. Will the market follow through and build on its appreciation for risk now that we are getting some better US employment numbers or are we to regress and call it a year? The second alternative looks appealing for most, however, it may not be the Ã¢â‚¬ËœbigÃ¢â‚¬â„¢ bazooka we see this week, but hopefully something of significance will persuade the market to at least consider giving the Eurozone and currency a second chance.
By weekÃ¢â‚¬â„¢s end, the EU heads of government and the ECB will have concluded a summit and announced a rate decision. Other central bank meetings by the BoC and RBNZ are expected to see policy left unchanged, while the market has priced in the RBA taking another step towards policy neutralization with a second consecutive-25bp ease. Currently, the growth and interest rate sensitive currencies seem well supported heading into the meetings, but, the risks are skewed towards disappointment.
The market believes Draghi and company will cut the repo rate by a further-25bp, with a Ã¢â‚¬Å“strongerÃ¢â‚¬Â possibility of a larger move. They could be more proactive, some analysts expect them to announce a long-term repo operations of greater than one year, along with loosening of collateral requirements. However, it seems unanimous on the street that the ECB will Ã¢â‚¬Å“notÃ¢â‚¬Â be offering definitive guidance on plans for sovereign bond purchases. ThatÃ¢â‚¬â„¢s not the Ã¢â‚¬Å“bazookaÃ¢â‚¬Â!
WhatÃ¢â‚¬â„¢s the EUR outcome? Easing of rates will undermine most currencyÃ¢â‚¬â„¢s strength and that includes the EUR outright and on the crosses. Hopefully this time Euro policy action may be seen as being proactive and Ã¢â‚¬Å“relieve perceptions of systemic stress and the continued viability of EMU.Ã¢â‚¬Â Do not expect that Ã¢â‚¬ËœeasingÃ¢â‚¬â„¢ alone to be sufficient in restoring confidence in peripheral bond markets. ThatÃ¢â‚¬â„¢s probably why the currency has a lot more to lose under current circumstances and market dynamics.
The summit will be watched intensely for an early holiday gift. The ideal outcome would be an agreement amongst member states of a move towards a more robust fiscal integration architecture. Although not the magic bullet, any agreement on new fiscal rules would give the ECB cover to increase the pace of its bond purchases. Since the EUR inception, the divergence in social and culture has the program failing and the lack of a central fiscal decision priority process would always have this project on the back foot. Fiscal integration is a big ask, if the market perceives that the union is heading in the right direction only then will it be deemed a big Ã¢â‚¬Å“WÃ¢â‚¬Â. The market will also be on the lookout this week for backdoor channeling of funds through the IMF.
This is a big week for Merkel, Sarkozy and Draghi’s leadership. They now have limited opportunities to find a stabilizing solution. The market know that if Euro loses, the rest of the world loses. This week, from a policy stand point cannot be deemed a gamble, they have to deliver a concrete framework that the market at least perceives to be some sort of solution, otherwise there is the abyss! It no wonder that its make or break for the EUR this week.
Week in FX: Europe Nov 27-Dec 2
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