Forex News – Progress made at EU Summit boosts euro but may not be game changer

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The agreement reached by European leaders after hours of deliberation at the EU Summit in Brussels in early hours on Friday morning led to lifting the euro above $1.26.

 

The deal creates more flexibility to the euro zone bailout fund, which is the European Stability Mechanism. Spanish banks will be recapitalized directly from the ESM fund without adding more debt on the Spanish government. The deal also removes senior-creditor status on the loans to Spain’s banks, with the goal of reducing borrowing costs and bring down Spanish bond yields that have recently reached dangerous levels above 7 percent on the 10-year bonds. An agreement was also reached to establish a single banking supervisor.

 

The following are comments from various banks in reaction to the news:

 

BARCLAYS: It says the summit exceeded expectations but is not a game changer, a theme reiterated elsewhere. The bank expects investors to stay cautious and remains bearish for the euro versus the dollar, expecting the single currency to grind slowly down to $1.15 over the next 12 months. “We therefore suggest investors look to fade this morning’s European currency strength versus the dollar and non-European commodity currencies such as the Australian and Canadian dollars,” the bank says.

 

CITIGROUP:  It expects the relief rally to ebb. While the announcement on the use of bailout funds to recapitalize banks is an important step in breaking the negative feedback loop between sovereigns and banks, the fundamental debt dynamics on the euro-zone periphery continue to deteriorate, Citi says, adding that the initial optimism will get bogged down as policy makers sort through the details, as has often been the case. “We would not be surprised if the same pattern repeated itself,” it says.

 

RABOBANK: Beware promises on ESM seniority, says Rabobank, adding that investors are likely to remain skeptical given the precedent set by Greece’s debt restructuring, where the ECB dodged taking a haircut on its holdings. “While the ESM’s explicit seniority has been abandoned it may ultimately retain an implicit seniority should push come to shove,” it says