Another day, another deadline…

The eurozone crisis has had its fair share of lines in the sand, not to mention ‘make or break’ summits of EU leaders. The mid-October meeting is now turning into one of those red line scenarios, with the timing of the latest troika mission to Greece (starting early September) reinforcing the growing feeling that continuing with more support for Greece and more slippage of the country’s targets and reforms cannot continue.

But the problem is that EU leaders have not or cannot agree on the alternative and Greece knows it. What does this mean for FX and the single currency?   As liquidity returns to markets in September, it’s likely that we are going to see another period during which FX markets struggle for sustained direction. The better tone to the euro, not only vs. the dollar, but also on the crosses, may have further to run but it’s sitting uncomfortably with some longer-term bearish views.

Guest post by Forex Broker FxPro

Commentary

Timing the euro reversal. What’s been notable during August has been the divergence between interest rate markets and the currency. Looking at 2Y swap rates (all bond yields are distorted one way or another), the small yield premium that euros trade over dollars has been falling and is now not that far from parity. The euro has managed to trade higher however, despite this trend, hence the divergence being seen. This underlines that the recent moves have been more a case of a reversal of the recent strong trend of shorting the euro vs. a basket of currencies. This could still have further to run, but goes against the gut feeling of many longer-term investors, so the challenge for markets will be to gauge when this reversal starts to run out of steam.

More disappointing German data. The Ifo business confidence data was once the key data release in the eurozone, but the sovereign crisis has firmly knocked that on the head. Economic performance in the core, whilst naturally important, does not and cannot overcome the monumental issues in many peripheral countries, especially when Germany remains adamant that the fruits of that relatively better performance are not going to seep south. The August data yesterday represented the fourth consecutive month that the headline data had fallen short of market expectations, down to a 28mth low at 102.3. It now looks quite likely that the German economy will contract in the current quarter, not a good backdrop for the rest of the eurozone. EUR/USD initially moved higher on the news to above the 1.2530 level, trading in a pretty tight range thereafter. With London closed yesterday, it pays not to put too much emphasis on such gyrations, given the lack of underlying liquidity in markets.