Euro wobbles but looks stronger now
Markets worldwide endured a turbulent day’s trading yesterday as investors reacted to the ban on naked short-selling by German financial authorities. Rather than producing the desired stability for the Eurozone, this left the Euro in the firing line as a way for investors to further express their negative sentiment towards the region. The move has had a number of effects. Markets have seen sell-offs and a loss of liquidity as investors become jittery over their reduced ability to manage positions. Elsewhere, rising risk aversion sparked by Germany’s move raised concerns over global growth and sent commodity-linked currencies sharply lower (indeed, the Australian and New Zealand Dollars were the worst performers as traders said hedge funds liquidated large long positions in both currencies). Furthermore, given this was a unilateral decision by the German authorities, questions have been raised regarding the current unity of the Eurozone, whilst the new measures and a widening sense of conflict between European governments and markets have priced an increased risk premium on European assets.
Unsurprisingly, the Euro suffered a volatile day. Having reached a four year low of 1.2144 on the back of the ban, EUR/USD rebounded to above 1.2400, it’s best one-day gain in more than a year. It appears the rebound was driven by market rumours rather than anything concrete. A report from a US think tank suggested that the G7 is worried about the speed of the decline in the EUR and is pondering some form of “multilateral intervention” to halt its slide. The EUR was also boosted by a rumour (strongly denied by Athens) that Greece was considering whether to leave the euro zone. A former head of Germany’s central bank was quoted as saying that Greece might eventually have to leave the euro-zone. Many traders suspect, however, that the rally yesterday was aided by intervention by the ECB, with rumours abound that the ECB held an emergency meeting where they decided to intervene in the market to buy Euros, where intra-day the market saw a few sharp rallies in EUR/USD (including one of 80 points).
On home shores, the minutes of the last MPC meeting, released yesterday morning, show that the central banks’ policy committee voted unanimously to leave UK interest rates on hold at 0.50% this month (having been at this level for over a year now), and to maintain the £200bn stock of assets purchased under the QE programme. The central bank said that economic data had evolved broadly as expected over the last three months and that this month’s policy decision was taken against a background of uncertainty as regards fiscal developments in the eurozone and the unclear path for the UK’s own fiscal policy given the recent election. It expects some of these uncertainties to have dissipated by the time it next meets.