Busch: The Illusion of an Impervious Euro
Let’s take a quick spin around the global currency markets to explore the major topics.
First, the price of oil continues to soar as the events in Libya have taken 1 million barrels per day out of the global supply. Brent crude is trading around $118 and Europe is feeling the pain as petrol prices go up. Libyan produced oil went to Italy and now Italy is getting refugees instead from MENA (Middle East North Africa) countries.
Next, the European Union members have been meeting to decide the future of the EFSF (bailout fund) and the future of the Maastricht economic pact. The EU is attempting to tighten rules for fiscal malfeasance and create rules for bond issuance. France and Germany were seen as hawks with tight rules that would carry expensive consequences for those countries that break the rules. There is serious pushback by other countries on these rules. They have a March 11th date to agree on what the rules should be and there is serious doubt they will agree.
Finally for the periphery countries, we have another downgrade and the likely need for another country to tap the EFSF soon.
Moody’s today announced a 3 notch downgrade for Greece to B1 and Greek CDS is trading over 1,000 ($100,000 to insure a $10 million Greek bond from default). Portugal is seen as the next to tap the EFSF fund as their borrowing costs for their 2 year debt is at 4.46% and the 10 year is at 7.49%.
Finally, the new Irish government is asking for a re-structuring of their bailout deal and Germany’s Merkel essentially said today that was not possible.
And what has the Euro done? It’s rallied. This is mainly on the basis of the hawkish shift at the European Central Bank. Last Thursday, ECB President Trichet stated that the central bank may raise interest rates next month to fight inflation pressures.
Today, ECB member Gonzalez-Paramo supported this stance by saying it is possible that policy makers will raise rates next month. This sounds hawkish and firmly focused on the inflation risks. However remember, the ECB still maintains special funding facilities that are well below their 1.0% overnight interest rate and shows up in periphery banks borrowing from the central bank.
The takeaway here is that anything that shifts this perception on interest rates should have a major negative impact on the currency. This can take the form of lower economic growth in Germany, lower economic growth in the periphery or inaction by the ECB in April. Perception is everything in politics and the markets. Right now, the belief is that the ECB will act in advance of the United States on interest rates.
It may be an illusion.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .
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