EUR Remains Under Pressure Despite EU Pledge as Traders Focus on Greek Austerity Vote Next Week and Italian Banks

We continue to have volatility with EUR pairs as trading continues to be dominated by headlines.

We had one positive development on the sovereign debt front in that EU leaders pledged to help Greece if they are able to push through further austerity measures.

From Bloomberg: “European Union leaders vowed to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week, pledging to do whatever it takes to stabilize the euro economy.

“We have agreed that there will be a new program for Greece,” German Chancellor Angela Merkel told reporters at an EU summit in Brussels today. “This is an important decision that says once again we will do everything to stabilize the euro overall.”

We also seem to have solidified the approach to any private sector bond-holders participation.

“Leaders of the euro area’s six AAA rated countries have said the key ingredient of a second package must be a pledge by banks, insurance companies and asset managers to maintain their holdings of Greek bonds.

An EU statement spoke of the need for “informal and voluntary rollovers of existing Greek debt at maturity,” avoiding a coercive exchange that would lead credit-rating companies to declare Greece in default.

To make the rollover voluntary, talks with Greek bondholders must be held on a country-by-country basis, not organized from Brussels, an EU official told reporters yesterday. The EU wants national central banks and finance ministries to speak to financial institutions in their countries, the official said.”

We remember that that was a big concern among the ECB and we had a battle between Germany and the ECB on that front which the ECB seems to have won. Merkel also came out and said that supporters of Greek debt haircuts have to consider the negative side effects.

At the same time markets were still selling the EUR today as there is no guarantee that the Greek austerity measures will pass the Greek parliament, and that vote looks to be scheduled for Tuesday. That will be a major hurdle for the Greek saga, and if passed could spell a relief rally for the single currency.

However, dangers lurk beyond Greece, and we got strong evidence of that in the form of Italy’s banking sector.

From the Wall Street Journal: “European stocks pared gains Friday, with banking stocks pushing lower after shares in Italian banks were temporarily suspended in Milan, causing fears to escalate about the country’s overall financial health.

Shares in a group of Italian banks including UniCredit, Intesa Sanpaolo, Banca Popolare di Milano and UBI Banca were suspended temporarily on the Milan stock exchange because of “high volatility,” a spokeswoman at Borsa Italiana said.

The development followed Moody’s Investors Service late Thursday stating that a group of Italian banks face possible ratings downgrades, as a result of a recent similar action to the country’s bond ratings and a reassessment of the willingness of governments to support the debt of financial companies.”

From ForexLive: “Italian bond yields are at record levels since the introduction of the euro at 212 bp. A clear sign of fresh contagion.”

US equities started with a sharp plunge and the USD strengthened as a result, but the as equities stabilized around 11 AM ET, the USD gave up some of those gains.

We therefore go into the weekend amidst uncertainty and with economic data continuing to show a global recovery that is losing some of its momentum, safe haven currencies should continue to be in demand against higher yielders and commodity-linked currencies.

Let’s see how the market’s digest this week’s developments, which included Bernanke trying his best to squash thoughts of QE3, weaker German and Chinese manufacturing data, and falling equities.

With that background, we should see the theme of risk aversion continue to start next week with the EUR still in the cross-hairs.

Guest Posted by Nick Nasad
Chief Market Analyst
FXTimes