The final quarter of 2012 is now well underway and, by all accounts, the single currency has been given something of a lift. What is more, this positivity has arrived against the backdrop of mounting belief that a Spanish bailout is now nothing more than a formality. It could be initiated as soon as next week, given that the perilous state of the country’s finances is high on the agenda for the Economic and Financial Affairs Council’s (ECOFIN) meeting scheduled for next Monday. With this being followed swiftly by an EU summit in the middle of October, it really does seem unlikely that Madrid will be without support for much longer.
But, can euro-dollar genuinely be poised to rise above $1.30? From a technical perspective, having failed to break below the support line at $1.280, a reversion does seem to be in place. It could prove to be exactly the sort of territory traders are left aiming for. But if you look at the fundamentals, the story seems a little different. Even if at the broadest levels the US economy makes some headway, success in Washington comes at the expense of a spiralling debt burden – and the prospect that the whole beast will come grinding as the fiscal cliff approaches. With these perilous events in the US as a point of comparison, perhaps the euro does look like a safer bet – for the time being.
But what threats are lurking out there that could serve to unsettle the common currency? Firstly, Eurozone retail figures for August are out on Wednesday and could post as much as a 2 per cent drop year-on-year. But, as long as we do not see a print worse than that, there is little justification for reactions to be anything other than muted. Next, Spain will try to sell a range of bonds at auction on Thursday. Although the European Central Bank (ECB) is firing on all cylinders to keep the common currency intact, perhaps a successful auction – even if the paper is categorized as junk – is little more than a formality. Similarly, the ECB rate decision is likely to be of little interest, given the Bank’s adoption of extraordinary measures to stop the wheels from coming off the Eurozone. Then there is the ECOFIN meeting, scheduled for early next week. But, then again, it is simply not in the mindset of this group to feed any disappointments to the markets. If we do not see definitive news of a bailout at this event, it is difficult to imagine that there will not be some very strong signals indicating that such moves are just around the corner.
So how long can the wounded Eurozone be expected to go on for? The prognosis does not seem all that encouraging – at least for those wishing for a coup de grace. German elections in Autumn 2013 are being seen by some as the first tangible crunch point. And, despite outward appearances, the German economy is flailing. Ironically this is something that is not being helped by having the euro trading at these resolute levels, since Germany’s recent success has been reliant on strong exports. With speculation mounting that Teutonic taxpayers will soon run out of patience as they repeatedly bail out the remainder of the Eurozone’s periphery, this is set to become a hot topic on the election trail.
Although Mark Twain never had the opportunity to say that “reports of the death of the euro have been greatly exaggerated,” it is difficult not to think he would be tempted to utter that phrase today.