AT THE start of this week’s trading the FX market was gripped by fears of sovereign debt default contagion as traders continued to worry about the prospect of another financial bailout of the Iberian peninsula. Despite an €85bn rescue of Ireland, investor confidence remained shattered as euro-dollar slid towards the 1.3000 level on fears that Spain will be the next domino to fall.
Although a rescue of the Spanish economy would present an almost impossible problem for the EU due to its size, the country may not be as vulnerable as the smaller members of the EU. Unlike Greece and Ireland, Spain is able to finance more than half of its borrowing needs domestically and so can withstand greater pressure from the credit market.
Nevertheless the currency markets are now at the complete mercy of the credit markets. Until sovereign debt yields from the periphery begin to stabilise, the downward pressure on the euro is unlikely to ease. For now risk aversion continues to dominate trade in the euro to the exclusion of everything else. However, as the week progresses attention is likely to shift to the other side of the Atlantic.
This Friday at 12.30pm we will get a look at US non-farm payrolls, which are projected to rise by about 145,000. The chances are good that the data may beat expectations, suggesting that US economic activity is picking up into the end of the year. If US growth is truly accelerating then that could support not only dollar-yen, which could rise to ¥86, but also the whole risk trade in the currency market. An improving US economy could act as a driver of global growth in 2011. That could calm investor nerves and help euro-dollar to stabilise as credit conditions ease.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail firstname.lastname@example.org.