The EUR remains under pressure as we begin the trading day today as massive protests in Spain and Greece against austerity measures add to the concerns that these countries will be unable to deliver on promises regarding budget reforms.
Spain is expected to release a series of reforms and a budget today as public deficits continue to increase while tax revenues are falling. Adding to the pressure, Spanish 10 year bonds rose above 6% yesterday. It certainly feels as if Spain is following down the same road as Greece. Speaking of Greece, leaders of the Troika and the Greek government are at a deadlock over how to proceed in solving the debt crisis.
Whatever comes out of the Spanish budget release, market reaction looks as if it will be negative. There are rumors of setting up a new agency to monitor fiscal adjustment. The budget is also supposed to include EUR 39 billion worth of austerity including tax hikes and continued structural reforms. These announcements likely will have the public unrest continue. In the continuing saga regarding Spain requesting a bailout, Spanish PM Rajoy stated yesterday that if borrowing costs were “too high for too long”, he was “100% positive that he would ask for a bailout”. According to the Bank of Spain, Q3 output has fallen at a “significant pace”. This will no doubt show a deficit of 7% of GDP or worse, which is way above the target level of 6.3%.
So now it seems as though the markets have completely given up all their gains that were seen after QE3 announcement. This falls in line with the contention that lack of true event risk here in the US is forcing traders to look towards the risk markets and these markets are not as attractive as before.
As traders return to safe haven currencies (USD and JPY), EUR is not the only currency feeling the strain. AUD and CAD are also weaker with the AUD straddling the 1.0400 area and the CAD testing the .9850 resistance level.
It seems as though investors are beginning to look at a possible USD rebound as we move forward. According to analysts, traders are purchasing “call options”, as they anticipate the USD rebounding from lows seen earlier this month. The perception here is that the economy of Europe is in worse shape that the US economy and interest in the USD should push it higher going forward.
The EUR direction remains downward, although this time the move is much slower that we have seen in the past. At the moment it seems the currency has topped out at the 1.3170 level and the next move is to test the support at the 1.2830 area. Reaction to the release of the Spanish budget is not expected to be positive and the massive protests within the currency will continue.
Asian and European equity markets have been mixed in overnight and early European trading. DOW Futures are higher this morning at 5:00 am, indicating a positive start to the US equity markets.