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Dec 22, 2014

12:43 PM EDT


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Home » Latest News » 3 Factors for EUR – ECOFIN Meeting, Rising Yields, ECB Purchases

3 Factors for EUR – ECOFIN Meeting, Rising Yields, ECB Purchases

1. Euro-zone Finance Minister Meeting Key to Start the Week for Euro

While the EUR/USD trades relatively quiet in today session, testing lows from last week but not breaking them the key fundamental development at the beginning of the week will be the meeting between that finance ministers of the euro zone.

For a technical assessment of the EUR/USD see today’s technical update: EUR/USD in a Possible Inverted Head and Shoulder; 1.3150-1.3160 is Key Resistance Area

At this meeting they are expected to formally approve the rest of the Greek bailout after the successful Greek debt restructuring take-up last week. This will eliminate yet one more uncertainty from the market though the situation with Greece will continue to be a drawn out one as now we begin to monitor whether Greek can meet its austerity measures and whether they can hit deficit targets going forward.

Second, attention will also focus on the battle between Germany and others such as Spain (and perhaps the incoming French President Hollande if Socialists win the French presidential election) in regards to how much austerity is needed and whether loosening some of those targets as Spain has done recently in order to facilitate growth is something that has any kind of agreement one way or another.

From Retuers: “Euro zone finance ministers will sign off on a second bailout for Greece on Monday and shift their focus to Spain, whose government looks set to violate newly agreed EU budget rules by missing its deficit target again this year.

Euro zone officials are worried that allowing Spain to soften this year’s target would create a dangerous precedent and undermine the credibility of the EU’s stricter budget rules.

The next important step will be whether there will be discussion of combining the European Stability Mechanism and the European Financial Stability Facility’s remaining funds into a bigger firewall against contagion now that Greece has gone through its debt restructuring.

The thinking in the back of the market mind is that’s Portugal may have to restructure its debt next and while it might be one or two years down the line the same situation could apply to Spain or Italy which would require much larger bailout funds.

However a final decision on combining the EFSF and ESM will likely not be undertaken until the March 30th Euro Summit when the heads of state are present. We’ll see if some preliminary indications on the subject are revealed, which would be a positive and confidence building measure for European markets.

2. Rising Yields in Italy and Spain – Possible Warning Sign

to start this weeks trading we see yields in the periphery – Spain and Italy – rising. Italy’s 10 year yield is our key risk indicator for the European sovereign bond complex and the fact that it is increasing could be a worrying sign. Will have to see if this becomes a theme to monitor throughout the week which would have negative implications for the euro.

That Italian 10 year yield was up 1%, climbing from around 4.84% to 4.91% before easing to 4.885%.

3. ECB Back in Bond Markets Last Week

Mr. factor worth considering for the euro is that the ECB step back into the bond markets to purchase bonds of Portugal, which has come under strain as it is the next domino likely to fall in terms of the need for restructuring after Greece secured its restructuring plan last week.

The amounts were small but after a three-week pause its indication that they are still strains in the sovereign bond markets and we see that with the rising yields we had just talked about Italy and Spain

From Reuters: “The European Central Bank showed that its bond-buying program is on life-support rather than dead as it spent a meager 27 million euros on government bonds after a three-week pause, ECB data showed on Monday.

Traders have said the ECB had stepped in to buy small amounts of Portuguese government bonds in secondary debt markets, halting a steep rise in the country’s debt yields.

As usual, the ECB will hold a ‘sterilization’ operation on Tuesday to neutralize the inflationary pressure the bond buys create, a move it does by getting banks to put down 7-day deposits equaling what it has spent in total on bonds.”

This European approach to bond buying is something that the fed may try and emulate as floated last week in a Wall Street Journal article. The fed is considering sterilizing any future quantitative easing by the borrowing back excess reserves from banks at short term maturities an attempt to keep any extra stimulus measures from impacting inflationary pressures.

 

 

We will be covering the implications of this meeting in our daily Market Intelligence Briefing on Tuesday.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to  FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

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