Euro Weaker as Speculaters Bet Some EU Nations will Struggle to Raise Funds

Today’s Top Stories 12.20.2010:

1. Euro Weaker as Speculates Bet Some EU Nations will Struggle to Raise Funds

Euro-zone debt concerns remained the biggest theme in the market Monday, after the EU summit last week agreed to form a permanent sovereign-debt resolution mechanism after 2013, but failed to expand the current bailout fund or end stresses over the common currency’s structure. In particular, leaders didn’t agree to establish common euro-area eurobonds to allow all 16 euro members to issue bonds under one umbrella.

The failure to introduce new measures to bring some calm to Euro-zone periphery bond markets (right now mainly the market for the government debt of Portugal and Spain) means we will continue to see the Euro (EUR) pressured.

The problem for the Euro is that investors are speculating that with the new wave of downgrades that European nations – like Ireland – will not be able to raise the funds necessary, which means further cut backs in government spending.

From Bloomberg: Moody’s Investors Service lowered Ireland’s credit rating by five levels to Baa1 on Dec. 17, the day after it placed Greece on review for possible downgrade. Irish bonds fell. Standard & Poor’s put Belgium on negative watch last week.”

The Swiss Franc is absorbing a good deal of the euro’s weakness, with the EUR/CHF hitting a record low yet again. In the last week we fell through the 1.29 area, today we slide down to 1.27.



But, the Euro was also weaker against the AUD and NZD, and a bit softer overnight against the USD and GBP.

One other focal point of today’s Euro weakness was worries voiced by the ECB about the proposed Irish banking system changes.

From Bloomberg: “Divisions in the euro-area leadership were highlighted as the European Central Bank said it has “serious concerns” that Irish draft legislation to fix the banking system threatens the ECB’s ability to run its liquidity operations. The bank commented in a position paper dated Dec. 17.

The ECB clearly feels that the fact the Irish government can alter the status and the treatment of incumbent bond-holders of the Irish banks could raise uncertainty about the collateral which is used in the ECB refinancing operations,” said UniCredit’s Maier in a telephone interview from Milan. “This story displays as well that there was a lack of coordination between the ECB and the Irish, which might be weighing on the market too.”


2. Tensions on Korean Peninsula Do Not Disturb Risk Sentiment, AUD Stronger

We had a geo-political risk factor over the weekend as there was some posturing and rattle-sabering by North and South Korea. South Korea went ahead with planned artillery drills despite warnings of retaliation by the North, kept traders a little nervous. But after the North on Monday said it was “not worth reacting”, things calmed a bit. Currency tied to investor sentiment like the AUD well supported. It just does not feel like we are going to come to war between North and South Korea, but this political gesturing can cause some indigestion in the currency markets. That wasn’t the case today, and the quick end to this latest round of tensions may have helped commodity currencies climb a bit.

The Australian Dollar (AUD) and New Zealand Dollars were both higher against the US Dollar, and gained on the weakling of the pack the Euro.
http://www.fxtimes.com/