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Euro Breaks Above 1.4000 on EU Deal

Last updated 10/27/2011 3:18 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

@import url(/css/cuteeditor.css); The EUR/USD hit a 2 month high breaking through the psychologically key 1.4000 barrier in early morning European trade after EU officials announced that  they reached a private sector agreement on the issue of haircuts for Greek sovereign bonds. Private sector holders will take a 50% write down on their holdings, allowing Greece to reduce its debt burden. Greece will be able to reduce its public debt to 120% of GDP by 2020 and will also receive up to $100 Billion euros from a new EU/IMF finance program.

In addition to the Greek haircuts, the EU summit also reached an  agreement to lever up the EFSF as much as five fold to bring its total buying power up to 1 Trillion EUR and to allocate up to 100 Billion EUR to help recapitalize the region’s banks.  The final details of these agreements will be worked out in the near future, but the broad terms of the deal were sufficient enough to boost risk assets across the board.

However, the question going forward is whether the deal stuck Brussels is sufficient enough in size and scope to help stabilize the  European credit markets for the foreseeable future. Skeptics have already raised the issue of moral hazard as other troubled periphery debt credits such as Portugal and Ireland may look to re-negotiate their debt burdens just as Greece did. Furthermore, given the draconian contraction in the Greek economy  over the past several months, it remains to be seen whether the country can stage a recovery even under the current reduced debt conditions.

It short it is not at all clear if the EU leaders attempts to pacify the secondary credit markets in the region will result in more receptive environment in the primary markets for such key members as Spain and Italy. Although both Spain and Italy are able to roll over their sovereign debt, they continue to pay punitive rates in the market and will face massive refinancing needs next year that could put further stress on their credit.

For the time being however, investors took solace in the latest agreements from Brussels pushing EUR/USD towards the 1.4050 level. In the eco data from North American session proves positive it could extend this rally in risk and push the pair towards the 1.4100 figure.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.