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Euro Rebounds But Debt Crisis Concerns Persist

Last updated 11/16/2011 4:16 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

A sharp short covering rally lifted the EUR/USD off its Asian session lows as the pair recovered the key 1.3500 level in early morning London trade on the back of speculation that China may be ready to provide some capital support to the region. Earlier, the euro slid to fresh 1 month lows at 1.3430 as  a cascade of stops sent the pair tumbling in during the Asian session dealing.

However, at the start of European trade debt yields retreated off their highs with benchmark 10 year Italian bonds  below the critical 7% level at 6.90% on rumors of ECB buying. ECB officials have continued to tow the party line that the central bank cannot be the agent of support for EZ credit markets with Yves Mersch the latest policymaker to reiterate the notion that the ECB will not be the lender of last resort. Yet with the credit crisis clearly spreading from Southern Europe to Northern Europe as Austrian, Dutch and French bonds all some under pressure, the need for ECB support has increased markedly.

While China may be willing to provide capital, its participation is sure to be conditional on further access to Eu markets and it is doubtful that the Europeans will want to cede a large part of their sovereignty in order to simply avoid the monetization of their debt. The ECB therefore will have to relent and become a much more aggressive buyer of EZ debt in order to stabilize the European credit markets.

The next test for the credit markets will come tomorrow when France auctions off a series of 2, 4 and 5 year notes. If the yields on French paper rise markedly from the auction prior with 5 year bonds inching towards 3% level, the crisis will shift into a whole new gear, forcing the ECB to reconsider its hands off policy.   

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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.