Market commentary: Euro falls as policy diversions weigh in

The euro fell for a third day against the dollar amid speculation monetary policies in the U.S. and Europe will diverge, weakening the currency despite the possibility of Greece reaching a debt deal with its creditors.

The single currency slid against all except one its 16 major peers as traders increased speculation that the European Central Bank’s quantitative-easing program will send it toward parity against the Dollar.

Another factor affecting the euro weakness against the dollar are the reported surge in U.S. home sales which was announced yesterday, adding further fuel to bets that the Federal Reserve will raise interest rates this year. A comparatively higher interest rate environment in the US will see a higher demand for the Dollar as capital typically gravitates towards economies where investors expect a better return (higher interest).

As a result, the increased sales pressure on the Euro will make the currency weaker as less investors are willing to hold onto the shared currency.

Another factor affecting the potential weakness of the Euro is literally more currency in circulation as a result of the quantitative easing program.

The euro has depreciated to $1.125 as of this writing, down from trading around $1.14 over the past two days. The euro also weakened against the sterling, down 0.5 percent this morning to £0.713 and 0.6 percent against the Yen to 139.10.

After a day of marathon talks yesterday, European leaders have reportedly given Greek Prime Minister Alexis Tsipras’s government 48 hours to make a final effort to satisfy creditors and end a five-month standoff. Leaders from Greece’s 18 fellow euro-zone countries agreed to step up the pace of negotiations to secure a breakthrough tomorrow that leaders can sign off at the end of the week.

German Chancellor Angela Merkel told reporters in Brussels yesterday that the package of proposals represents “a certain step forward, but it was also said very clearly that we’re not yet where we need to be,” “Hours of the most intensive deliberations lie ahead of us.”

Apart from the complications involved with reaching an agreement with its European counterparts, Tsipras is also bracing for a battle at home as any agreement will have to secure backing from the country’s parliament. The most difficult task will be convincing hardliners in his own ruling coalition to back a deal that would breach his Syriza party’s pledge to end austerity.

Stocks rose around the world continued to rise amid optimism Greece can strike a deal with creditors. The Stoxx Europe 600 Index advanced 1 percent this morning while Standard & Poor’s 500 Index futures climbed 0.3 percent. The Shanghai Composite Index finished 2.2 percent higher after falling as much as 4.8 percent.

In the sovereign bond markets we continue to see a shift to peripheral bonds, as yields on Spanish and Italian government bonds fell 7 bps to 2.03% and 2.08% respectively and the yield on the 10- year German Bund rose 1.4 bps to reach 0.895%. On the local bond market, yields fell, with the government stock maturing in 2024 falling to 1.82%.

This article was issued by Simon Psaila, Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.