Worsening Eurozone debt levels could see September Euro sell-off

9

While volatility levels have been dropping in forex markets recently fault lines in the Eurozone have been deepening, which could see the Euro under pressure come September when institutional investors return to their desks and re-evaluate Eurozone asset markets.

Asset markets have generally been soothed by comments supporting economic growth from the US Federal Reserve, European Central Bank and China’s leadership. For instance, yields on Italian and Spanish government bonds have tightened. However, the situation in the Eurozone remains deeply troubling and could soon result in another round of volatility, which would be negative for EUR/USD.

By Justin Pugsley, Markets Analyst MahiFX. Follow MahiFX on twitter at: https://twitter.com/MahiFX

Earlier this week it was reported that the Eurozone’s debt to GDP ratio had hit 92.2% in the first quarter of 2013, up from 88.2% a year earlier with total debt standing at a record Euro 8.75tn. Especially worrying is that the largest rises in debt came from Spain, Greece, Portugal and Eire – all countries at the epicentre of the Eurozone’s debt crisis.

Another negative for the Eurozone is that rather than addressing systemic weakness during the current breather, policy makers have instead been backsliding. Nowhere near enough progress has been made in creating a banking or fiscal union, which would go a long way to stemming contagion effects and reassuring the markets.

Institutional investors are likely to find these factors troubling and could decide that peripheral Eurozone bonds are not worth the risk. Historically, a blow out in peripheral Eurozone yields has led to sell-offs in the EUR/USD.

EUR/USD could again test support at 1.30 and 1.28 after September

EURUSD_MahiFX_25Jul_2013

…but there are some positives
But there are two positives, which should stop an outburst in volatility turning into an outright crisis – at least for the time being. In the short-term, there’s the ECB’s Outright Monetary Transactions programme designed to support sovereign bond markets of struggling Eurozone countries if needed. The mere mention of OMT has proved a powerful tonic for peripheral bond markets.

The second point is that signs of an economic recovery could start to come through in some of those peripheral Eurozone countries later this year. Longer term it is exactly what’s needed to see improvements in credit ratings and reductions in debt to GDP ratios. It’s the sort of progress, which would gradually see closure for the Eurozone crisis.

Ultimately, the Eurozone faces the stark choice of fully integrating into something resembling a nation state like the US with fiscal transfer mechanisms and returning to growth or breaking up. However, going by previous form the Eurozone only makes those reforms under duress, such as when it is under the threat of breaking up, therefore more rounds of the Eurozone crises seem inevitable.

Get the 5 most predictable currency pairs

About Author

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets Analyst MahiFX  Follow MahiFX on twitter and on facebook  Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice