Volatility Expected As Europe Crisis Grows
Saturday, November 26, 2011
Tweet
All eyes in the currency market are turning to Europe again as the sovereign debt crisis rages on.
Volatility will reign with bond auctions for several European countries, including Italy, scheduled for next week. In the U.S., crucial jobs data will be released on Friday, providing another clue on how the recovery is progressing.
Market participants are nervous about the bond auctions as higher borrowing costs in Europe indicate that financing debt is becoming increasingly difficult. Even Germany is struggling to sell its debt. Questions about the very survival of the euro are being raised.
"Investors want to see what the appetite for the bonds are and what yields are paid," said Brian Kim, currency strategist at Royal Bank of Scotland.
With borrowing costs soaring, investors are looking for policy-makers to resolve the situation.
Euro-zone finance ministers meet on Tuesday and a decision is expected on the next aid package for Greece. Efforts are also likely to be made at the meeting to add more leverage to the euro zone's bailout mechanism, increasing the amount of debt it can purchase or guarantee.
The euro is likely to fall further unless European leaders take steps to boost their rescue options, or investors show a renewed appetite for sovereign debt. Many analysts predict the currency will fall below $1.30 by the end of the year.
Belgium, whose credit rating was downgraded to double-A from double-A-plus by Standard & Poor's on Friday, has an auction on Monday. Italy has an auction on Tuesday, followed by Spain and France on Wednesday.
Investors will also be watching the euro-dollar swap rate, an indicator of the cost for European banks to acquire the currency they need to finance loans denominated in the greenback. Banks unable to exchange their euros for dollars in the open market may have to lean on the European Central Bank.
Currently, the ECB is an unattractive option for all but the most desperate financial firms, as the central bank charges a penalty rate for its dollars, and has stiff collateral requirements.
But the ECB could relax some of its lending rules if banks are having too much trouble financing their debt. The central bank next meets on Dec. 1.
So far, "the ECB is holding firm," said Kim of RBS. "People are looking to the ECB to step in and solve some of these problems but it's not clear they'll say anything before their next meeting."
"The marginal banks that are finding it most difficult may have to go to the ECB," said Shyam Rajan, rates strategist at Bank of America Merrill Lynch, who expects the ECB may relax some of its rules for lending to the banks to ease the situation.
In terms of economic data, the most highly anticipated figure in the U.S. is the monthly nonfarm payrolls number due Friday.
The expectation is that 118,000 jobs will have been added in November. If the number comes in below that, investors will be disappointed as it will show the U.S. economy is still struggling.
That could send investors back into the dollar, which is viewed as a relatively safe asset to hold when the economic outlook is grim.
By Anusha Shrivastava - eFXnews
Volatility will reign with bond auctions for several European countries, including Italy, scheduled for next week. In the U.S., crucial jobs data will be released on Friday, providing another clue on how the recovery is progressing.
Market participants are nervous about the bond auctions as higher borrowing costs in Europe indicate that financing debt is becoming increasingly difficult. Even Germany is struggling to sell its debt. Questions about the very survival of the euro are being raised.
"Investors want to see what the appetite for the bonds are and what yields are paid," said Brian Kim, currency strategist at Royal Bank of Scotland.
With borrowing costs soaring, investors are looking for policy-makers to resolve the situation.
Euro-zone finance ministers meet on Tuesday and a decision is expected on the next aid package for Greece. Efforts are also likely to be made at the meeting to add more leverage to the euro zone's bailout mechanism, increasing the amount of debt it can purchase or guarantee.
The euro is likely to fall further unless European leaders take steps to boost their rescue options, or investors show a renewed appetite for sovereign debt. Many analysts predict the currency will fall below $1.30 by the end of the year.
Belgium, whose credit rating was downgraded to double-A from double-A-plus by Standard & Poor's on Friday, has an auction on Monday. Italy has an auction on Tuesday, followed by Spain and France on Wednesday.
Investors will also be watching the euro-dollar swap rate, an indicator of the cost for European banks to acquire the currency they need to finance loans denominated in the greenback. Banks unable to exchange their euros for dollars in the open market may have to lean on the European Central Bank.
Currently, the ECB is an unattractive option for all but the most desperate financial firms, as the central bank charges a penalty rate for its dollars, and has stiff collateral requirements.
But the ECB could relax some of its lending rules if banks are having too much trouble financing their debt. The central bank next meets on Dec. 1.
So far, "the ECB is holding firm," said Kim of RBS. "People are looking to the ECB to step in and solve some of these problems but it's not clear they'll say anything before their next meeting."
"The marginal banks that are finding it most difficult may have to go to the ECB," said Shyam Rajan, rates strategist at Bank of America Merrill Lynch, who expects the ECB may relax some of its rules for lending to the banks to ease the situation.
In terms of economic data, the most highly anticipated figure in the U.S. is the monthly nonfarm payrolls number due Friday.
The expectation is that 118,000 jobs will have been added in November. If the number comes in below that, investors will be disappointed as it will show the U.S. economy is still struggling.
That could send investors back into the dollar, which is viewed as a relatively safe asset to hold when the economic outlook is grim.
By Anusha Shrivastava - eFXnews
Labels:
Daily Market Recaps Articles
