The main focus this week was the EU summit that took place last Sunday. Yet the details expected regarding the tackling of the current euro zone crisis were expected to be presented in a second summit scheduled for late Wednesday.
In the former part of the week hopes continued to prevail ahead of Wednesday’s much anticipated EZ crisis deal. The main discussion was expected to revolve around three issues namely; 1) Bank recapitalization 2) EFSF leveraged capacity and 3) haircuts for private holders of Greek debt.
Ahead of the meeting some generic details started coming out. Earlier issues raised by France (and opposed by Germany) on whether to employ the ECB as a leveraging agent for the EFSF seemed to have abated.
With regards to bank recapitalization, European officials identified an amount of around 100 billion euro, that should be enough to shore bank’s balance sheets. As for more firepower for the EFSF, German officials had been quoted as saying that the EFSF is to be leveraged to 1 trillion euro. News reports indicated that the German parliament would be voting on the leveraging of the EFSF on Wednesday.
The main function of the European Financial Stability Facility (EFSF) is to provide loans to euro zone members that are experiencing economic difficulties. It issues bonds to finance loans to the countries and the loans are than guaranteed by other states in the euro zone, each country guarantees varying percentages of the loan but in the end they would cover 100% of the loan when summed up.
The issue that apparently needed more clarity seemed to be the extent of the haircut that will be demanded (presumably still voluntarily) on private holders of Greek debt . On this matter Eurogroup chairman Mr. Juncker mentioned that the private bond holders may face losses between 50 - 60%.
Despite the event risk, given it would not be the first time euro zone leaders disappointed investors, the Euro held well its gains against the US Dollar. It was unlikely that Forex investors would be willing to add short positions especially if the outcome was a positive one.
At week start the euro was down only a marginal -0.14% and maintained its gains against the USD, Swiss franc and the Japanese yen. The USD was hesitant; it shed an average 0.31% when seen against the majors – with the biggest losses coming from against the AUD.
The rose to 6-week highs last Monday, yet the currency pair kept within a 138pip range in the days prior to Wednesday’s summit. EUR/USD traded in the range of 1.3822 - 1.3960 up to the time of writing. Where we expect it to go from here?
For the current week we expect the currency pair could extend the move higher towards 1.4087 region – which level corresponds to the 100-day moving average. A break above 1.4022 would signal an accelerated move up. Of course the event risk posed by the EZ summit could also hit the Euro negatively.
UK parliaments rejects calls for referendum on EU membership
In the United Kingdom the British Prime Minister David Cameron had to face political headwinds on issues raised with regards to Britain’s EU membership. The British Parliament debated calls for a referendum on this issue last Monday after media reported that around 60% of UK citizens wanted a referendum on EU membership.
The British parliament finally rejected calls for an EU membership referendum but the Prime Minister will have to deal with the fact that over a quarter of his party had in fact voted in favour of an EU membership vote.
Against the single currency the British pound remained close to flat, currently trading at 0.8683 after opening at 0.8693 at week start. Price trading for the was quite volatile and in the range of 0.8674 – 0.8725. In the former part of the week the British Pound shed a marginal -0.05% against the majors although it lost only to the Aussie and the Canadian dollar.
EZ growth raises doubts on upcoming growth
On the data front PMI data from the euro zone last Monday continued to raise concerns on the prospects of growth, as they came in weaker than the previous and the expected levels; although industrial new orders for the EZ surprised to the upside.