Comments and forex-analytics from FBS

[ryuroden]

June 6: risk sentiment has improved

Yesterday’s emergency conference of G7 finance ministers and central bankers passed without big headlines: the officials agreed “to monitor developments closely ahead of the G20 summit in Los Cabos.” The market took an optimistic view thinking that the policymakers are preparing some major developments for 18-19 June 2012.

Risk sentiment improved, Asian stocks gained (MSCI Asia Pacific Index +1.2%), US dollar and Japanese yen weakened versus the most of their counterparts. The greenback was also affected as Chicago FRB President Charles Evans said that “extremely strong accommodation” is needed taking into account the poor economic data released in the US so far.

Australian GDP added 1.3% in the first 3 months of the year vs. 0.5% advance expected. AUD/USD rose by more than 100 pips. USD/JPY went up for the third day in a row as Japan’s finance minister Jun Azumi Japan’s indicated that G7 nations remain supportive of intervention to address extreme currency moves.

Important events today:

- Euro area: the ECB meeting results. The majority of experts think that the central bank will leave its benchmark rate unchanged at 1%. If the ECB does cut rates, euro will get a blow.

- US: beige book will give us more hints on the current economic conditions in the United States ahead of the FOMC meeting on June 19-20.

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If you have any questions to our analysts, you’re welcome to ask or comments for this article!

Edited June 6, 2012 by ryuroden

[ryuroden]

Commerzbank: EUR/USD may break higher

The single currency recovered versus the greenback from June1 minimum at $1.2288 and is currently trying to overcome resistance at $1.2515 (23.6% Fibonacci retracement of euro’s decline in May, downtrend resistance).

Technical analysts at Commerzbank think that EUR/USD will break downtrend channel within which it has been trading since the beginning of last month. The next resistance for the pair will be found at $1.2624 (January 13 minimum). If euro manages to rise above this point, downward pressure will significantly subside. Note the positive signals from daily MACD and RSI.

On the other hand, the specialists warn that if EUR/USD breached support of $1.2288, it will become vulnerable for a decline to $1.2058 (200-month MA) and $1.2000 (psychological level).

Chart. Daily EUR/USD

[ryuroden]

BNP Paribas: bearish view on EUR/GBP

Analysts at BNP Paribas expect the single currency to decline versus the British pound in the medium term. The specialists think that the recent rise of EUR/GBP provides a good opportunity to go short.

According to BNP Paribas, 2 interest-rate cuts by the European Central Bank in November and December of last year have foiled euro’s value. “Further rate cuts by the ECB in the third quarter are likely to further erode the euro’s yields and drive EUR/GBP lower,” the analysts say.

The bank underlines that data from the Swiss National Bank show that reserves in pound have doubled this year. The specialists believe that such allocation strategy that could be used by other banks giving sterling more strength against euro.

Chart. Daily EUR/GBP

[ryuroden]

RBS: bullish on AUD/USD

Analysts at RBS recommend buying Australian dollar versus its US counterpart at the current levels stopping in case of the close below the 10-day MA ($0.9765) and targeting $1.0095 and then $1.0240.

The specialists give the following reasons for being bullish on Aussie: the market based around a previous minimum at $0.9667, MACD indicator gave a buy signal in overbought territory and the market has now broken both its 10- and 21-day MAs.

According to RBS, resistance levels for AUD/USD lie at $0.9861 (December 2011 minimum), $0.9934 (May 22 maximum) and $1.0000, while support for the pair is found at $0.9667 (November 2011 minimum) and $0.9397 (October 2011 minimum).

Chart. Daily AUD/USD

[ryuroden]

Will the Fed incline to more easing?

The FOMC’s meeting will take place on June 19-20. The odds that the Federal Reserve will do more stimulus increased due to the disappointing US economic data and continuing concerns about the euro zone’s debt crisis. At the same time, the Fed may refrain from active actions this month taking the wait-and-see approach in order to have better understanding of the economic situation. In addition, the proposals to add easing will surely face resistance from some Fed’s officials.

The Fed has different options:

- doing nothing and continuing to assess the economic outlook;

- more strongly signaling a willingness to act later if the outlook more clearly worsens;

- small precautionary measures like extending for a short period its Operation Twist as the $400-billion program is set to end this month (selling short-term securities and using the proceeds to buy long-term ones);

- bolder action such as launching another large round of bond purchases in case of significant slowdown.

The path chosen by the Fed will depend on its assessment of US economic conditions. An important thing will be whether the FOMC members downgrade their economic forecasts after slightly improving outlook in April. For now recession is not seen as a threat, the main source of concern is the pace economic growth – it should be high enough for the unemployment to keep lowering. In May US jobless rate rose to 8.2%, some experts say though that this is a temporary increase after unusually intense hiring in winter provoked by warmer weather. The Fed’s policymakers may worry about the seasonal adjustments which complicate their estimates.

The opinions in the Fed are divided. Chicago FRB President Charles Evans said that “extremely strong accommodation” is needed. Cleveland FRB President Sandra Pianalto, however, claimed that she wasn't yet convinced that the outlook had significantly darkened. There are those among the FOMC officials who doubt the effectiveness of buying more bonds when interest rates are already very low or worry about higher inflation.

Preparing for the Fed’s meeting later this month, don’t miss important comments: the Fed’s Chairman Bernanke will testify on Thursday, June 7, before the Joint Economic Committee of Congress. The Fed’s Vice Chairwoman Janet Yellen is speaking tonight.

[ryuroden]

Spain admitted that its banks need help

Spain has finally stopped its unbending rejection of external funding to assist the bank recapitalization. Rumor has it that the indebted country’s government is currently negotiating with EU leaders. This week Germany has nearly forced Spain to accept help from the European Stability Facility to support its banking system. Both Germany and Spain stand for the creation of a banking union within a framework of which the European stability funds will be able to finance the banks directly.

However, according to Spanish Economy Minister Luis de Guindos, Spain is not planning to request a bailout of its banks before the results of an IMF report (June 11) and further reports from independent auditors (end of June). On basis of this information the Spanish government will take further anti-recessionary actions.

Photo: Reuters

[ryuroden]

June 7: economic background and currencies

The risk sentiment was rather positive. Asian stocks rose (MSCI Asia Pacific Index +1.5%). Japanese yen has broadly weakened on lower demand for safe havens.

Australia has made a contribution to reviving the risk appetite. The nation’s economy added 38.9K jobs in May after a 2.2K contraction in April and a 7K growth forecast. Unemployment rate increased in line with expectations to 5.1% from 5.0%. Aussie is strengthening for the fourth consecutive day. In general the country’s recent economic data is positive for the currency: the rate cut on Tuesday was less than some expected, while nation’s GDP surprisingly grew by 1.3%.

The greenback is under pressure ahead of Ben Bernanke’s testimony as many think that the Fed's Chairman may signal further stimulus in order to help US economy recover. The Federal Reserve’s Vice Chairman Janet Yellen, a well-known dove, claimed yesterday that American economy “remains vulnerable to setbacks” due to slowing job growth and deteriorating financial-market conditions and may warrant additional monetary stimulus. San Francisco’s FRB president John Williams and Atlanta’s Dennis Lockhart also talked about possible need for an action, saying their level of concern had risen since the Fed's April meeting. Read more on the Fed’s policy here.

The single currency has managed to break out of May downtrend channel and settle above $1.2500 as the short-term players trimmed euro shorts on the hopes of more policy action, both in Europe and the United States. EUR/USD rose to $1.2585, about 2.3% above 2-year minimum of $1.2288 hit last week.

However, trading will remain quite volatile, with risk assets vulnerable to declines. Uncertainty will stay high until there’s a solution of banking and sovereign solvency problems.

Events to watch today:

Britain: Bank of England’s MPC meeting.

Euro area: Spanish and French 10-year bond auctions.

US: unemployment claims.

Have a profitable trading day with FBS!

If you have any questions to our analysts, you’re welcome to ask or comments for this article!

[ryuroden]

Key options expiring today

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2420, $1.2420, $1.2500, $1.2525 (large);

EUR/GBP: 0.8040, 0.8050, 0.8060, 0.8100;

USD/JPY: 78.50, 78.70, 79.00, 79.50;

EUR/JPY: 99.00;

AUD/USD: $0.9800.

[ryuroden]

Scotiabank: short- and long-term outlook for loonie

Analysts at Scotiabank revised down the near-term outlook for Canadian dollar due to deteriorated growth prospects of China and India and euro zone’s debt problems. According to the bank, the pair USD/CAD will keep gaining towards the end of the month and current quarter.

However, the specialists think that in the longer term the outlook for loonie will significantly improve once risk aversion and the rapid flow into US dollar denominated assets subside.

In their view, CAD will strengthen against its US counterpart in the second half of 2012. Scotiabank underlines that the Bank of Canada is likely to hike interest rates long before the Fed, the ECB or the Bank of Japan. In addition, Canada still has top credit rating and developed bond market – these factors will support demand for loonie. The analysts expect USD/CAD to slide to 0.9900and by the year-end.

Chart. Daily USD/CAD

[ryuroden]

RBC, Westpac: RBA rates and forecast for Aussie

The Reserve Bank of Australia cut its benchmark interest rate by 25 bps to 3.5% this week getting close to the 3% level set after the global financial crisis has hit the fan. Many analysts expect the RBA to reduce the borrowing costs more this year citing deteriorating global economic prospects.

RBC: “We’re looking for at least one more cut, but our rates outlook is under review at the moment … and clearly the risk is that terminal cash ends up below 3.25% [by the end of the year].”

Westpac: the RBA would cut rates again in July, in August and in December, taking the cash rate to 2.75% by the year-end. “Relative to the May [cuts], there has been a series of observations … that suggest to us that the [Reserve] Bank is prepared to cut rates significantly further.”

Westpac expects AUD/USD to slide to 0.9600 by September before returning above the parity by the end of 2012 line with a pull-back in the USD index due to the monetary stimulus policies in Europe, China and the US, particularly in Q4. “The combined effects will reverse the negative dynamics current swirling around Aussie,” say the specialists. According to the bank, AUD/USD will reach $1.0200 by the end of the year and moving even higher in early 2013, before leveling out at mid-year in the $1.0500/0600 area.

Chart. Daily AUD/USD

[ryuroden]

EUR: how long will the strength last?

The EUR/USD cross bounced from its two-year low (June 1) and broke through the strong $1.25 resistance level. The pair is pushed up by the prospects of the additional QE in the US, the words of the ECB President Mario Draghi that the market underestimated the political decision of the EU to preserve the currency block and the results of the Spanish and French bond auctions.

Strategists at BMO forecast the EUR/USD to reach $1.2625 (Jan. low), while analysts at Nomura expect the pair to bounce to $1.2700. The nearest resistance for the pair lies at $1.2600 (psychological level) and $1.2690 (38.2% retracement of May 1-June 1 drop).

However, in long-term most analysts remain bearish on the prospects of the common currency. The euro is expected to decline against the greenback as the EU leaders struggle to resolve the crisis. Moreover, economists expect that Germany will finally agree on the Eurobonds issue in order to support the peripheral countries. In case European politicians fail to compromise, the market situation will definitely worsen: massive outflow of capital out of the region is expected. Draghi said the ECB will continue to supply euro zone banks with the liquidity they ask for in the refinancing operations at least until early 2013.

Chart. Daily EUR/USD

[ryuroden]

SocGen, RBS: comments on EUR/GBP

Analysts at Societe Generale note that the single currency has made something like a U-turn 2 weeks ago as it rose from 0.7950 (May 16 minimum) to the levels in the 0.8100 area this week. The specialists point out, however, that EUR/GBP is facing resistance at 0.8130 (50-day MA). If the Bank of England doesn’t deliver monetary stimulus today, euro may get under renewed selling pressure. In addition, the bank underlines that the pair isn’t oversold now, while there will likely be more negative news from the euro area. As a result, SocGen regards bearish risks as quite high.

Strategists at RBS claim that EUR/GBP may get stuck in the 0.7950/0.8221 area. In their view, resistance for the pair lies at 0.8142 (May 3, June 5 maximums), 0.8192/97 (May 1 maximum) and 0.8222 (April 25 maximum), while support is found at 0.8063 (gap opening), 0.7950 (2012 minimum) and 0.7695 (2010 minimum).

Chart. Daily EUR/GBP

[ryuroden]

SNB increased currency reserves

According to the Swiss National Bank statement, the SNB’s foreign currency reserves reached a record high in May (303.8 billion Swiss francs from previous 237.6 billion francs).

The regulator attempts to defense the franc floor under the conditions of the uncertainty in the euro zone. It is necessary to note, that the 1.20 threshold protects the franc from excessive strength as a safe haven currency and supports the Swiss economy.

Analysts at Bank Sarasin underline that the SNB will be forced to intervene if the euro zone’s situation worsens. However, according to analysts at ING Group, for the moment there is no reason to believe that the floor could be broken even under higher pressure.

[ryuroden]

BoE left policy unchanged… for now

The Bank of England decided to leave its monetary policy unchanged: the benchmark rate remained at 0.5%, while the size of the asset purchase program was left at 325 billion pounds.

UK central bank was under serious pressure to do more stimulus as British economy has entered official recession and is affected by the European debt crisis. The nation’s GDP contracted by 0.3% in the first 3 months of the year. In addition, manufacturing activity plunged in May in the sharpest fall since November 2008. So, the market had reasons to expect more easing from the BoE.

At the same time, the story isn’t clearly over yet: there are a lot of events ahead which concern Europe, Britain’s main trading partner. The matter is about Greek elections and the decisions which the region’s authorities will have to make afterwards. So, as with the European Central Bank the focus turns to the next BoE meeting in July and analysts at ING Bank expect further stimulus.

British pound showed the second day of solid gains versus the greenback and retraced more than 50% of last week’s slump. GBP/USD rose from Friday’s minimum at $1.5233 to the levels in the $1.5670 area, above the previous weekly maximum of $1.5515.

Chart. Daily GBP/USD

[ryuroden]

June 8: economic background

The day has begun with a risk-off trade as potential gains on the unexpected Chinese interest rate cut quickly evaporated after the Fed’s Chairman Ben Bernanke didn’t signal further monetary stimulus yesterday.

On Thursday China cut its interest rates for the first time since 2008, attempting to defend the export-oriented economy from the euro zone’s turmoil. The move may mean that the economy is weaker than expected. Tomorrow watch for inflation report, investment and output figures –traders are now worried that the figures may be quite disappointing.

Asian stocks declined (MSCI Asia Pacific Index +1.3%), commodity currencies weakened. Japanese yen strengthened versus all of its main counterparts The Dollar Index rebounded from almost 1-week minimum.

Yesterday Japan’s Q1 GDP was revised up to +1.2% (q/q). USD/JPY declined today, though the pair retains weekly gain as the Bank of Japan’s expected to announce more easing next Friday (June 15). Analysts at Westpac think that the BOJ will be the first among the 2 central banks (the BOJ, the Fed) to ease policy, so this may provide support for the greenback.

Commodity prices and Chinese slowdown still have an impact on the Australia’s trade, but improvement could be on the way: Australia’s trade deficit declined from 1.28B Australian dollars in March to 0.20B in April. According to RBA Governor Glenn Stevens, the economic situation in the country is much better than in other economies. Stevens didn’t give any hints on the future monetary policy easing. Moreover, he underlined that the previous easing was not supposed to create speculative demand for Australian assets. AUD/USD is down in the $0.9850 zone after testing the parity yesterday.

The single currency eased down from $1.2625 (January minimum, June 7 maximum) to test the levels below $1.2500. German trade surplus exceeded the forecast of 13.3B euro posting 16.1B euro in April, up from 13.7B in March. The positive figures provided some support for EUR/USD, but not much as the debt woes are still hovering over the region.

There’s a bunch of important Canadian data (housing, employment and trade) as well as US trade balance released later today.

Have a profitable trading day with FBS!

If you have any questions to our analysts, you’re welcome to ask or comments for this article!

[ryuroden]

UniCredit: 2012 currency outlook

UniCredit doesn't expect the single currency to show significant rebound versus the greenback anytime soon. In their view, EUR/USD has settled in the $1.2500/$1.2000 trading area and the potential recovery will remain limited and offer new selling opportunities.

The specialists think that the concerns about the Bank of Japan’s intervention will prevent more USD/JPY sales. The greenback’s strength will drive GBP/USD down to $1.5200/5000. As for the Swiss franc and commodity currencies (AUD, NZD, CAD), trading’s expected to remain quite volatile.

Here are the bank’s forecasts (submitted on June 1):

Data from UniCredit

[ryuroden]

SocGen: sell AUD/USD on China

Analysts at Societe Generale recommend selling Australian dollar versus its US counterpart at $0.9975 stopping at $1.0175 and targeting $0.9500.

The specialist claim that the fact that China has cut interest rates means that the nation’s authorities are concerned about growth: “a simple interest rate cut would have been good news, but China also adjusted deposit rates and lending rates implying that we won't see a big investment stimulus like we did in 2008.”

The People's Bank of China (PBoC) cut official 1-year borrowing rate by 25 bps to 6.31% and 1-year deposit rate by a similar amount to 3.25%. The cut marked Beijing's biggest move to date to support growth.

The PBOC announced it was giving banks the freedom from June 8 to set deposit rates as high as 110% of the benchmark rate and offer rates on new loans for as little as 80% of official policy rates, an additional 10% points of leeway from the current 90% limit. Until now commercial banks have been barred from charging rates on deposits higher than the benchmark set by the central bank.

Chart. Daily AUD/USD

[ryuroden]

Key options expiring today

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2400, $1.2430, $1.2500, $1.2550, $1.2600, $1.2650;

GBP/USD: $1.5500;

EUR/GBP: 0.8055;

USD/JPY: 79.00;

AUD/CAD: 1.0250;

AUD/USD: $0.9975.

[ryuroden]

EUR/USD: bears never left

The EUR/USD cross resumed the bearish movement: euro failed to overcome the $1.2626 resistance (January minimum).

Many analysts believe that yesterday the cross reached its peak before the Greek elections (June 17, Sunday). This week Greek question was a wallflower and the focus moved to Spain, but, obviously, the closer the vote is, the higher is the pressure. However, there are several timid beams of light in Europe: German Chancellor Angela Merkel seems to be ready to act to ensure stability in the euro region, while Spain managed to raise 2 billion euro on a bond auction.

Analysts at Commerzbank believe the EUR/USD cross could continue the upward movement after the current pullback. In their view, the next targets for the pair are $1.2786 and $1.2825. However, the downside is still more likely: support lies at $1.2058 (200-month MA) and $1.2000 (psychological support).

Also note that market players will trade on a strong correlation of EUR/JPY and AUD/JPY with stock markets (uncertainty weighs on stock markets – yen strengthens).

Chart. Daily EUR/USD

[ryuroden]

EUR/GBP: technical comments

The EUR/GBP cross is trading sideways since early May. Most analysts expect the pair to continue a downward movement: the ECB is going to lower rates in the forthcoming months, while the sterling will benefit as a safe haven within Europe. For instance, strategists at BNP Paribas expect the pair to reach 0.7899 pounds.

According to analysts at RBS, however, in a short term the EUR/GBP cross is not likely to leave the 0.7951/0.8220 range, because there is a number of important levels inside.

Resistance:

0.8140 (Aug.2010 minimum);

0.8220 (former support).

Support:

0.8066 (June 2010 minimum);

0.7951(2012 minimum);

0.7695 (2010 minimum).

Chart. Daily EUR/GBP

[ryuroden]

EUR: Spain’s bailout and French elections

There’s much to discuss after an eventful weekend – and it’s all about Europe.

Firstly, after all the talk Spain’s bailout deal has finally been decided: European governments agreed to provide the nation 100 billion euro ($126 billion) in order to save its banking system. Spanish Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize banks without external help. Spain is the fourth euro zone member after Greece, Ireland and Portugal to get financial help. EUR/USD opened the week with a gap up at 2-week maximum in $1.2640 area. The single currency gained as the markets saw uncertainty diminish and the European policymakers willing to act.

Mariano Rajoy. Photo ITAR-TASS

Secondly, he first round of French parliamentary elections took place on Sunday. President François Hollande’s Socialist Party and its allies are leading in the race for the 577-seat lower house. The final results will be clear only after another round of voting next Sunday as few candidates got more than the 50% of the vote required to win their seats outright. Hollande needs a majority in the legislature to ensure a Socialist prime minister and to more easily pass legislation to keep his campaign promises (such as tax increases on the wealthy and corporations). The upper house, the Senate, already passed to the Socialist control.

François Hollande. Photo Laurent Cipriani / AP

Euro’s current recovery is viewed as correction. EUR/USD has already retraced about 38.3% of its May decline. The scope for the rebound is to $1.2785 (50% retracement). CFTC reports that euro shorts reached last week another record maximum, so these positions may be unwound – positive factor for euro. As for the factors acting against EUR, one should name this week’s economic data (may confirm that the regions is craving for ECB’s monetary stimulus) and Greek elections on June 17.

Chart. Daily EUR/USD

[ryuroden]

Key options expiring today

Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2500, $1.2510, $1.2650;

USD/JPY: 78.00, 78.10, 78.15, 78.25, 78.60, 79.00, 79.15, 80.00;

EUR/JPY: 100.00;

AUD/JPY: 78.60.

[ryuroden]

Euro area in June: meetings & bond auctions

Just to be ready – here’s the info on the euro area’s coming debt auctions and the meetings’ agenda:

- Tuesday, June 12: Greek T-bill auction. Dutch 20-year government bond auction.

- Wednesday, June 13: Italian T-bill auction. German bond auction. German parliament will decide whether it will vote on ESM/fiscal pact before end June.

- Thursday, June 14: Italian bond auction.

- Sunday, June 17: Second round of French parliamentary elections. Greek national elections.

- Monday, June 18: G20 Leaders summit in Los Cabos, Mexico.

- Tuesday, June 19: Spanish T-bill auction, Greek T-bill auction [tentative]. G20 leaders summit.

- Wednesday, June 20: German bond auction.

- Thursday, June 21: Spanish and French bond auction. Euro-zone finance ministers meeting.

- Friday, June 22: European Union finance ministers meeting. German Chancellor Angela Merkel, French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy meet in Rome.

- Monday, June 25: Belgian bond auction.

- Tuesday, June 26: Spanish T-bill auction, Italian bond auction. Dutch 10-year government bond auction.

- Wednesday, June 27: Italian T-bill auction. Allotment of ECB three-month long-term refinancing operation.

- Thursday, June 28: Italian bond auction. EU heads of state summit

- Friday, June 29: EU heads of state summit.

Photo: Reuters

[ryuroden]

CFTC traders positioning data

The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that during the week to June 5 speculators’ positioning changed the following way:

EUR: the net short position rose by 11K contracts to the new record of 214.4K.

GBP: the net speculative position switched from long to short of 3K contracts for the first time since the end of April.

JPY: the net speculative position switched from short to long of 12.1K contracts for the first time since the end of February.

CHF: the net short position rose from 30.6K to 33.6K contracts – not much of a change.

CAD: the net long position decreased by almost 20K to just less than 15K, the smallest since the end of February.

AUD: the net short position increased from 35.5K to 51.2K contracts. Until recently, the largest net short position since at least 1993 was recorded in 2006 just below 32K contracts – the bears are multiplying.

USD: traders betting on the greenback’s advance held a net $40.06 billion in wagers, up 5% from the previous week. That is similarly a record since at least 2007.

It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.

Data from CFTC

[ryuroden]

Spanish bailout: mixed feelings

Euro’s reaction at the announcement that Spain will get 100 billion euro to refinance its banks was impressive: the pair EUR/USD opened 130 pips above Friday’s close. However, there are many things which still remain unclear.

Analysts at Danske Bank note that, firstly, it’s not clear who will be providing the funds – the EFSF or ESM? Secondly, the big question is how the rating agencies will react on the news taking into account the fact that the bailout means another 10% of GDP in debt – European nations will lend money not to Spain's banking system directly, but to Spain. Spain’s Prime Minister Mariano Rajoy called the money “a credit line” and not a “bailout”, but that doesn’t seem to reflect the reality. Although this debt will be cheaper than borrowing at the market, it will still increase the nation’s debt burden.

What’s even more important to ask: will 100 billion euro be enough? Although the IMF claimed $50 billion could be an appropriate amount, JPMorgan Chase analysts recently estimated that Spain could need as much as 350 billion euro. Another unknown is how much time Spain will be given to pay back the cash and what kind of conditions could be applied. If Spain gets better terms than other bailed out euro zone countries, this may lead to tensions, particularly with Ireland. Anyway, looks like we’ll get a lot of details in the next few weeks. In addition, don’t forget that there’s the risk that investors’ attention will turn elsewhere, for example, to Italy, whose banks are also in trouble and whose own borrowing costs are rising.

Cartton by Paresh Nath, The Khaleej Times, UAE