Boosted by bond support programs from the ECB, QE infusions by the Fed and a legal green light for the establishment of ESM the EURUSD has enjoyed a near vertical rise over the past few months as it gained more than 1000 points since July. However, now as we near the start of the final quarter of the calendar year further upward progress may become decidedly more difficult as the currency faces challenges on fiscal, political and economic fronts.
Spain remains the key focus for the currency market as the country needs to refinance approximately 30 Billion euros of sovereign debt over the next six weeks while at the same time staging local elections amidst an atmosphere of economic hardship. Prime Minister Rajoy has been coy about asking for direct aid from EU as the recent decline in rates has eased the need to do so. Given the upcoming elections Spanish politicians will be highly reluctant to ask for a direct bailout and much will depend on how well the markets absorb the new supply of issuance into the year end. If yields begin to climb once again, the EURUSD could quickly resume its descent.
On the political side support for euro continues to wane in the regionâ€™s largest economy. The latest poll by Die Welt shows that nearly half the Germans think that their lives will be better without the EU. Such pessimism, while greatly misplaced, could be a major obstacle to further EU integration efforts by Ms. Merkel especially if Spain and Italy decide to combat any additional austerity efforts. Meanwhile reports today about the precarious financial state of Deutsche Bank – Germany’s largest bank , could signal serious problems as well. The bankâ€™s leverage ratio ( a ratio of its assets to capital) was approximately 40 to 1 indicating that a mere 3% decline in the value of its portfolio would render the bank insolvent.
Lastly even as the macro picture begins to ease the focus back on the micro economic data may send investors out of the euro as the week proceeds. On Thursday the markets will get a glimpse of the PMI data – which is the best snapshot of the latest economic conditions of the ground. Most forecasts are looking for steady to slightly better results, but if the readings miss to the downside they could trigger a sell off towards the 1.3000 level as the week proceeds.