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Euro Continues to Weaken

European finance ministers will be meeting this week to announce the gravity of an Irish bailout and decide upon a long term strategy to re-assure the foreign exchange markets and provoke long term stability.

The euro dropped below support yesterday as pessimistic traders dropped Euro positions down to $1.3261 eur/usd. The pound managed to re-gain some of last weeks losses, gaining to within spitting distance of 1.1900 gbp/eur. Our clients with buying requirments are cautious that a decisive bailout and strategy could re-assure foreign exchange traders enough to start buying the Euro again. If this does transpire, however unlikely it is, then the rate of exchange could come crashing down very quickly, it is well worth having protective orders in place below support levels.

It is commonly reported that the chief finance ministers will be seeking further reassurance this week. Most traders believe that the peripheral countries ( Spain, Italy, Portugal) aren’t doin enough to allay market fears.

 

The Euro “has scope to move down further, with political developments and commitment from euro zone policymakers likely to be the focus,” said Paul Mackel at HSBC.

The dollar has benefitted recently from bout of short covering as investors shrugged off comments from U.S. Federal Reserve Chairman Ben Bernanke that quantitative easing could be bigger than estimated. After last Fridays disappointing non-farm pay roll reading the picture for the American economy is looking more bleak. Traders are reacting as always by buying up 10 Year T notes, they are still considered the safest investment.

Fed Chairman Bernanke appeared in an interview on CBS-TV’s “60 minutes” late Sunday and communicated his view that it is possible that U.S. monetary policymakers increase the additional $600 billion in asset purchases announced at the last Fed meeting.

The weakness in the European currency complex is likely the primary reason for the dollar’s support, nullifying the impact of Friday’s nonfarm data which punished yields and sent the trade-weighted dollar down nearly 1 percent. This was its worst daily loss in over a month, according to Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.

“Reports that both President Trichet and the IMF have suggested that the size of the European bailout fund needs to be larger has removed the calm that had entered European markets late last week,” she wrote. “The combination of the Irish budget vote, today’s Eurogroup meeting and several ECB council member press conferences leaves a lot of room for headline risk.”

Looking forward to the week ahead we have interest rate announcements from both New Zealand and the UK, Forex markets aren’t expecting any movement on either.