Spain Weighs Heavily on the EUR/USD

By FX Empire Analyst - Barry Norman
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Spain Weighs Heavily on the EUR/USD

Spain Weighs Heavily on the EUR/USD

This morning in Asian equity markets are mostly in the red with China again outperforming. However, this is no help for the single currency. EUR/USD is still drifting a few ticks lower from yesterday’s close.

There are again few eco data on the agenda with little market moving potential. The production data from the likes of France and Italy are interesting, but they are no market movers. In the US, there are only second tier eco data on the agenda. Several Fed members will speak, most of them after the close of the European markets. The Fed Beige Book for the November meeting is a wild card. So, global factors will continue to set the tone for trading.

Understandably, markets haven’t changed their minds after decent earnings from Alcoa. The headlines from the IMF global financial stability report on Europe (but also on the rest of the world) are not really risk-supportive. So, European markets might be in somewhat of a difficult, cautious start this morning. At the same time, the indecisiveness in the EU crisis management might move a bit to the background as the market chatter on the sidelines of the meetings of the EU/EMU Finance Ministers might become less.

The key question is whether the euro should be further punished from Spain not asking for ESM assistance already at this stage. Our view remains that Spain will ask for aid in a not-that-distant future and that the Draghi-put (OMT) will be used to contain a new storm on peripheral EMU bond markets. In such a scenario, the correction of the euro shouldn’t go really far, at least not for this reason. Of course, that doesn’t say anything whether the correction should stop here, especially not when global sentiment on risk remains fragile, too.

The change in sentiment was inspired by a diffuse list of negative headlines. The IMF downgrading its forecast for the world economy was an obvious one. The fund also delivered a sharp warning on the economic and financial situation in Europe. A lot of headlines also mentioned market caution ahead going into the earnings season as investors feared quite a big impact from the global slowdown on corporate results. These factors are indeed not really supportive for risk; nevertheless, the news flow on Europe was the major driver for the correction, especially as far as EUR/USD is concerned.

Spain remains the key driver for sentiment on the European markets. EU policy and the Spanish policymakers are apparently in no hurry to proceed toward a Spanish bailout request from the ESM anytime soon. This message was given several times yesterday by different parties who are involved in the EMU crisis management. If Spain waits to submit an aid request, the ECB OMT will stay idle too and this is annoying financial markets. We see this as the main reason for the rather sharp decline of EUR/USD yesterday. EUR/USD was heavily sold at the start of trading in Europe (partially also IMF driven).

Mounting global uncertainty and rising Spanish bond yields/spreads, clearly found the downside of EUR/USD vulnerable. EUR/USD dropped from the 1.2860 area at the start of the US trading session to reach an intraday low at 1.2859, after the close of the European markets. EUR/USD closed a risk-off day at 1.2885.

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