- Euro US Dollar Exchange Rate Falls as Safe-Haven Demand Abates – Rallying commodities and strong stocks saw investors favour riskier, higher yielding currencies.
- Italian Bank Crisis has No End in Sight as Mountain of Bad Debt Grows – Concerns are increasing over how the Italian government will deal with the now €360 billion of bad loans.
- Investors Continue to Shun US Dollar as Near-term Fed Rate Hike Still Unlikely – After previous mentions of up to six hikes throughout the year, we have yet to see even one.
- Grab Bag of Brexit-Period Ecostats likely to cause EUR/USD Movement.
The Euro US Dollar exchange rate rallied over the course of yesterday as the recent run of safe-haven demand came to an end, placing extensive negative pressure on the US Dollar and seeing it drop across the board.
The Euro continues to be held down by growing concerns over the Italian banking sector, which runs the risk of causing a full-on European Banking crisis as Italian banks struggle with over €300 billion of bad debt.
As a result the Euro is mostly down against the majors but managing to hold fairly steady against the US Dollar.
The Euro US Dollar exchange rate traded at 1.1084 after enjoying a substantial rally over yesterday’s session.
Euro (EUR) Fails to Find Much Support amid Growing Italian Bank Crisis
Monday’s Eurogroup meeting of Eurozone finance ministers attempted to tamp down concerns over the growing Italian banking crisis that threatens to spread to greater Europe.
Structural issues and the Italian banking sector’s lacklustre recovery from the 2008 financial crisis are mostly to blame for its inability to wrestle with what has now became €360 billion worth of bad debt. Italian GDP remains 8% smaller than in the pre-2008 period and as a result the country does not generate the tax revenue required to help tackle these non-performing loans.
Italian Prime Minister Matteo Renzi has eyed a publically funded bailout for the flagging financial institutions but new European Union banking guidelines enacted in January of this year set out the need for creditors to be bailed in first before any taxpayer money is used. The Italian head of state appears ready to flout these rules before the crisis deepens.
The ECOFIN (Economic and Financial Affairs Council) meeting that took place yesterday mainly focused on plans to sanction both Spain and Portugal after the two countries failed to stay within European Union budgetary rules. Both countries failed to reach the deadline for correcting their extensive budget deficit and as a result they could lose EU funding and possibly incur hefty fines.
The Euro was dealt another blow yesterday as European finance ministers again made the case for the ongoing Brexit significantly hurting European growth if uncertainty doesn’t abate.
US Dollar (USD) Plummets across the Board in Reaction to Non-existent Safe-haven Demand
The US Dollar ended last week on a high note as Friday’s non-farm payrolls release dashed forecasts of 180,000 to reach a whopping 287,000. This increase in fresh jobs for the US economy sat in stark contrast to last month’s measly figure of 11,000 that gutted hopes of any near-term US Federal Reserve rate hikes.
Monday saw the release of the Labour market conditions index for the US economy and it showed a gentle increase, but the figures still remain in the negative. Even a very favourable print would likely have been ignored as safe-haven demand has markedly deflated so far this week.
Strong stocks and rallying commodities saw investors flocking towards riskier, more lucrative commodity-correlated currencies such as the Australian and Canadian Dollars, however the recent slip in oil prices has lessened ‘Loonie’ demand.
Investors are weary to stay with the US Dollar now that a Fed rate hike appears to be very far in the future and instead are happy to invest in the higher yielding, more volatile currencies.
Forecast: EUR/USD Set to Rally if Safe-Haven Demand Remains Muted
Later today the US import price index will be released at about 1:30pm UK time, and the report is forecast to rise slightly from the previous figure of -5.0% to -4.6%. However, it is unlikely to elicit much movement in the US Dollar if safe-haven demand remains low.
In-fact a whole host of US ecostats are set for release today but most investors will be looking to later in the week for the higher-impact ecostats with more movement potential, such as the advanced retail sales report, consumer price index and the University of Michigan’s confidence survey.
However in the extreme near-term the biggest factor for ‘Greenback’ movement will be any returning safe-haven demand after the recent dip.
Impactful European ecostats are fairly thin on the ground this week with just Eurozone industrial production set for release on Wednesday. The figure is forecast to fall but if the report can exceed expectations in either direction then there could be potential for Euro movement.
Friday holds the rest of the Eurozone data. The European Central Bank survey of professional forecasters will be the first publication released and the report will give a detailed insight into the forecaster’s thoughts for the future of the Eurozone.
Afterwards will be the Eurozone inflation release which is forecast to remain at its present levels. However, the Euro US Dollar exchange rate could find upward support if the report shows inflation getting closer to that 2% target.