No relaxation for the Euro
Angela Merkel should have been waking up this morning to beautiful sunshine and headlines stating that she had saved the Euro. Unfortunately, that would have been the case back in July when the initial proposal for increasing the EFSF was announced, but that was before Spain and Italy were dragged in to Sovereign debt crisis. Now, according to the markets, the fund looks entirely inadequate with the word ‘trillion’ needing to replace ‘billion’ at the end of any amount.
Italy yesterday struggled to roll over debt, paying 4.68% for €3.1bn of three year debt – up 81 basis points from last month. If the ECB are still purchasing Italian debt then this is a worrying upward trend. However, this is a trend which will continue until the leaders of the Euro zone realise that the problems are with the single currency itself rather than being purely a debt problem. After all, Japan, the US and UK all have larger debt than the Euro zone as a whole, but the focus has not been on them to anywhere near the same extent.
Eurozone Preliminary Inflation data will be the main market focus today in the context of the ECB meeting next week. While it is clear that the ECB will loosen monetary policy further, we are not convinced that it will cut the headline rate at Trichet’s last meeting. Instead we expect an extension of Long-term refinancing operations (LTROs) to one-year and further pledges to inject liquidity into the banking system. Only should those measures fail will the ECB reverse policy. It will be politically difficult for Trichet to cut rates at his final meeting as it would rather tie the hands of his successor. Still, with a possible deal on Greece emerging, that fall in yields could reverse if markets start to become more risk loving. For now, movements in equity markets will trump data.
What does this all mean for me? Well buying your EUR, USD, AUD or any other currency at the wrong time could cost you a fortune. There is no crystal ball but Currency UK can give you the information you need to make an informed decision.