Merkel says no to eurobonds

Publication date: 27 June 2012
Author: Richard Driver, CaxtonFX

Merkel was unequivocal yesterday that shared debt liability – eurobonds – would not come in to place in the EU as long as she lived. Rating agency Egan Jones downgraded Germany’s credit rating and put it on a negative outlook, which also ensured the euro traded heavily yesterday. There were some more dovish comments from the BoE but sterling had a decent session regardless.

Today’s session brings an Italian bond auction and a UK CBI realised sales figure, though focus will be increasingly directed towards tomorrow’s EU Summit.

STERLING/EURO: More tough talk from Merkel helps this pair regain the €1.25 level.

• Merkel’s fierce opposition to the idea of mutualised eurozone debt, which would bring down the borrowing costs of the periphery but raise Germany’s, put the euro under some further pressure yesterday. She may prove a little more flexible on allowing the permanent bailout fund to boost banks’ capital levels, if not on allowing it to bail them out directly.

• Bank of England Governor King caused a little confusion by not ruling out an interest rate cut in principle, but later comments comfirmed that QE is the BoE’s preferred method of supporting the UK economy. There were further dovish comments, with King stating he is “very pessimistic about the eurozone.” Still sterling trades firmly, emphasising that the market remains more concerned with the debt crisis. This pair trades at €1.25.

STERLING/US DOLLAR: UK borrowing figures were poor but a weak US consumer confidence survey saw the dollar weaken off.

• Chancellor George Osborne would have been disappointed to see the UK public sector net borrowing figure come in higher than expected, driven by a fall in income tax receipts and a jump in welfare benefits – symptoms of a double-dip recession. Nonetheless, the news was equally bad from across the pond, with a US consumer confidence gauge hitting a five-month low.

• We have some UK CBI realised sales data out later this morning, which shouldn’t do too much to hurt the pound. Global sentiment remains pretty weak and we continue to favour the dollar, but this pair trades above $1.56 for now.

EURO/US DOLLAR: The euro’s bounce was pretty flimsy on Tuesday as suspicions linger that the EU Summit will yield no results.

• The euro is getting a fair amount of support at current levels from Asian central banks but not enough to give this pair any upward momentum. Italy will be auctioning some 6-month T-bills today and it will be interesting see what happens to yields, given how nervy the market is at present.

• This pair is trading at $1.25 this morning and current support levels could give way today amid ongoing risk aversion.

STERLING/AUSTRALIAN DOLLAR: This pair lacked direction as the aussie dollar stands firm ahead of the EU Summit.

• Asian stocks saw some relief last night, which leant the aussie dollar some support. However, this pair traded in a remarkably tight range, suggesting reluctance amongst investors to take positions ahead of a risky EU Summit.

• Further range-bound trading seems a good bet again today; this pair currently trades just below 1.5550.

STERLING/NEW ZEALAND DOLLAR: Sterling was able to edge higher against the kiwi dollar, helped by a weak NZ trade balance figure.

• As expected, New Zealand’s trade surplus narrowed in May, driven by lower commodity prices. There was some talk of further Chinese monetary stimulus in the next couple of months, but no major moves were seen on the exchange rates.

• This pair is trading slightly higher at 1.98 but with resistance met at this level, we are likely to see these gains given back.

STERLING/CANADIAN DOLLAR: The Canadian dollar found some strength thanks to improved US equities, but this pair remains in range.

• US consumer confidence data was poor yesterday but US equities enjoyed a mild bounce even amid further concerning headlines out of the eurozone. This pair has met significant resistance around and above 1.6050 and so it proved yesterday with the pair paring back by a quarter of a cent.

• Still, this pair remains very much in the middle of its one-month trading range of 1.59-1.61, and shows few signs of breaking out of this area ahead of the EU Summit.