5 Reasons Why The Stress Tests Could Hurt EUR/USD
On Friday at 16:00 GMT, the European stress tests results will be released. In the past few weeks, EUR/USD enjoyed weak American data, and also enjoyed the anticipation for the European stress tests. With the terrible European debt crisis, these results are supposed to show that the banks are stable, and to mark the end of the crisis.
But it doesn’t have to be necessarily so:
- Learning from the past: The American stress tests that were conducted over a year ago, were positive, but didn’t boost the contrary. The dollar continued falling in May 2009, and this trend continued for many months. The explanation was risk appetite trading – traders felt relieved and went for more “risky” currencies, and also stocks.
- Methods: The methods of these stress tests are unclear. The European authorities will probably publish some of the methods, but it might not necessarily convince everybody that these tests are serious.
- Sell by the fact: The Euro already rallied in anticipation of the expected positive outcome. It could easily be a case of “buy by the rumor, sell by the fact” – a Euro sell off can possibly begin after the results are released.
- Timing: The results are released at 16:00 GMT on Friday, as the London session ends. As it often happens on Fridays and also last Friday, many traders avoid holding “risky” assets over the weekend. The Euro could drop regardless of the stress test results.
- Bad results: While the expectations are for positive results, with a vast majority of institutions passing the tests, this isn’t guaranteed. A scenario of gloomy results cannot be ruled out.
How do you think that the stress tests will impact EUR/USD?
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The only banks that are going to fail are government owned banks of Germany and Greece, they are not stupid enough to publish something negative when they already know what effect this will have, most of the bad debt is on the smaller banks books anyway, and those have not even been tested.
Thanks for your comment. I also think that the tests were set to succeed.
There is a political overlay to this: In the US, there was no upside to “disciplining” banks from a particular region. Not so, Europe. If Greece/Spain/Portugal are having trouble organizing the political will to adopt the necessary austerity measures, the stress tests could be a clear “shot across the bow”. Fine line, though: terror tactics have a way of only producing more terror.
I agree that stress test is so far positive.But it left the big question mark that is that European unable designed it as per US stress test methodology,which US had performed in 2009.But on the whole one thing is for sure that weak Euro is in the benefit of Euro related countries because they can increase there exports and it would be easy for them to get out this recession with low priced Euro as US did last year
The last comment is worth discussion, as everybody cant have a weak currency, Euro has been push up hard by China, the last few impulse moves up (if you didnt know).
Reason, so their own currecny is cheaper relative to the euro and their exports remain cheaper, on the downside European exports are more expensive.
You are correct that the best thigs for most of southern europe and Germany etc is a cheaper euro.
Whether the market chooses to come out and punish the ECB for yet more brushing under the carpet and blatent lies, hiding in another bucket .. to muturity bucket which is where most of the Soverign debt got shuved and hence avoided being tested altogether. Not good, market will start asking what are they trying to hide.
A weak euro is in the best interest of the eurozone. Like last year how the US took advantage of the weak dollar to boost exports, EU will take advantage of the weak euro to boost exports more so to china, so more likely to survive any recession