Euro starts the week on weak ground as worries about Greek stability continues

News - Banking

Written by Ray Clancy

Monday, 08 February 2010 09:29

The Euro and growth linked currencies are still on slippery ground as risk appetite remains subdued on the back of mounting fiscal worries in the euro zone and lingering concerns about a global tax on banks.
Traders said today that investors are sceptical of the Group of Seven’s reassurance at the weekend on Greece and every move up by the Euro is being used as a selling opportunity.

‘Until we see signs of acceptance by those nations that austerity measures need to be put in place to resolve the fiscal imbalances, the Euro will continue to deteriorate,’ said Thanos Papasavvas, head of currency management at Investec Asset Management in London, which oversees about $60 billion.

At the weekend G-7 meeting of finance ministers and central bank governors in Canada no new statement on currencies was issued, but support was rising for a levy on banks that could pay for global governments’ rescue of the financial system.

Last month US President Barack Obama spooked financial markets when he proposed tough reforms for the banking sector.

At present the Euro is not far from $1.3586, its lowest level since May 2009. It lost more than 1% last week, its fourth consecutive week of losses. The single European currency has shed around 10% from its December 2009 high around $1.5140, as jitters about the fiscal problems in Greece spreading to Portugal and then to Spain intensified.

Investors tend to buy the yen and dollar in times of heightened risk aversion as they unwind leveraged carry trades financed by borrowing in both these currencies.

‘The risk aversion emanating from Greece, China tightening fears, renewed concerns about the performance of financial stocks, and Obama’s banking plan is taking a life of its own, and the fragility of the recovery is now a market millstone,’ said David Watt, senior currency strategist at RBC Capital.

‘It seems like old times, in that two days of closure are treated as two days when events can spiral out of control, rather than a restful weekend,’ he added.

The European Central Bank left interest rates on hold at a record low and said that the economic outlook is clouded in uncertainty. Chairman Jean-Claude Trichet said that some government in the EU have ‘sharply rising deficits and should have a strong focus’ on reforms.

The situation in the economies of Portugal, Greece and Spain is likely to deteriorate further and this is going to raise other issues, including bank’s balance-sheet problems, according to Stephen Jen who helps manage $1.5 billion at BlueGold Capital Management, a London-based hedge fund. He expects the Euro to slide to a new trading range, between $1.30 and $1.35, in the short term.

Meanwhile, investors will pore over data this week to gauge whether an economic recovery will stall, posing an additional challenge to the ECB. ‘We’ve seen a two speed Euro zone with economic and fiscal divergence being ever more evident between the core members of the Euro zone and those in the periphery,’ explained Jeremy Stretch, senior currency strategist at Rabobank International in London.