EUR did what was expected

The one and a half big figure slide in the single currency after the S&P’s rating announcements last week was a tad too much. Historically, with FX anticipating a downgrade, the EUR typically weakens -0.3%. Along with a few other positive gems that have come to the fore over the past 24-hours, its the EUR bears that are swaying into loss positions, but, for how long?

Risk assets are again rallying on the back of strong Chinese growth data. Chinese economic expansion beat estimates in the 4Q (+8.9%), belying fears on a sharp slow down of growth. It seems that China’s hard landing fears are not imminent due to the Euro-zone crisis thus far being described as a ‘slow bleed,’ unlike the sudden collapse of the US financial crisis. With growth reports continuing to beat market expectations has helped sooth fears that Europe’s debt related problems would slow the Chinese economy. Even regional retail sales and industrial output have been beating expectations.

The EFSF downgrade from AAA to AA+ has had a minimal affect on risk appetite. It helps that the programs funding requirements are largely covered until the middle of the year. The beleaguered Spanish borrowing costs have also been doing their bit for the cause this morning, surprisingly they have helped to push the EUR higher. The Spanish Treasury sold +EUR4.88b of 12 and 18-month bills, just below the maximum target, at an average yield of +2.049% and +2.399% respectively, managing to halve the cost of funding since the December issue. Demand for the 12-month bills was 3.54 times the amount sold, compared with 3.14 times the last time the securities were on offer.

Germany’s Economic expectations has improved significantly, beating all expectations, as stronger US data, falling Euro sovereign periphery yields and the ECB’s liquidity seems to have given a new-lease-of-life to “optimism.” The German ZEW index rose to -21.6 from -53.8 this morning for a second consecutive month after declining nine-months in a row.

All this positive momentum will persuade the market to target for the weak stops just above the 1.28 handle. Some technical analysts are eyeing these levels as an ideal area again to short the market. Even with Greek officials agreeing to reconvene with creditors tomorrow, after discussions last week stalled over the size of investor debt swap losses, negative comments from rating agency’s will not help market psyche. “Greece is insolvent and will default on its debts” according to Fitch, certainly nothing new in thought, however, the fear that the euro area’s most indebted country is unlikely to be able to honor a March bond payment in reality, is not supportive of the single currency longer term.

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EUR move exaggerated?

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell