WHY EUR SHRUGGED OFF SPANISH BAILOUT

After racing to a high of 1.2668 at the start of the Asian trading session, the euro ended the day lower against the greenback. European and North American traders clearly do not share the optimism of their Asian counterparts who drove currencies and equities sharply higher overnight. The intraday reversal in the EUR/USD and eventually in stocks reflects the market’s skepticism about the Spanish bond deal being the solution to all of Europe’s problems. With 10 year Spanish bond yields rising to a high of 6.6 percent this skepticism is certainly warranted because it does not rule out the risk of a broader sovereign bailout and the risk of a country like Greece leaving the euro.

So far, the rescue of Spain has not turned into a rescue for the financial markets. For the past few months, everyone from investors to central bankers has been sitting at the edge of their seats fearing that more serious problems in Spain would lead to Armageddon in the markets. Spain’s problems deepened after the IMF reported a EUR40 billion capital shortfall in local banks, forcing Eurozone officials to hold an emergency meeting and Spain to accept a EUR125 billion bailout. This amount would cover the capital shortfall of Spanish banks and provide some additional cushion. Yet, the EUR/USD failed to hold onto its initial gains because the Spanish bailout leaves many unanswered questions such as which bondholders will be subordinated. It also does not remove the risk of Greece or any other country leaving the Eurozone. The Greek elections are scheduled for this weekend and it will be a close one.

 Source: Ace Pips-Forex Trading News and Resources