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11 Jun 2013
Flash: Europe outlook - The Bank of Tokyo-Mitsubishi UFJ, Ltd
FXstreet.com (London) - Derek Halpenny, research at The Bank of Tokyo-Mitsubishi UFJ, Ltd said the euro remains incredibly solid and has advanced further versus the dollar.
He explained that ECB President Draghi did speak yesterday and stated that rates would rise once the euro-zone economy improved – a statement of the obvious. Adding, that Draghi also highlighted the limits of OMT adding that the plan could never be used to buy government debt to bailout an insolvent government. This topic was raised in the context of the constitutional court two-day hearing starting today over the legality of OMT.
Derek Halpenny notes the court has never ruled against any euro-zone process before and said it won’t happen this time either. The formal judgement is later in the year but like previously there may be some conditions stated after this hearing but any conditions will only be consistent with what the ECB already argues – that OMT is not about financing governments with solvency troubles. He feels this is unlikely to have much impact for the euro given the predictable outcome. His bank suspects that the current euro demand is probably emanating from the unwinding of long high yielding currency positions. Both the dollar and the euro were likely used as funding currencies for these positions and hence the euro is modestly out-performing the dollar. Once these positions are lightened he expects the euro to then start to drift lower versus the dollar.
He explained that ECB President Draghi did speak yesterday and stated that rates would rise once the euro-zone economy improved – a statement of the obvious. Adding, that Draghi also highlighted the limits of OMT adding that the plan could never be used to buy government debt to bailout an insolvent government. This topic was raised in the context of the constitutional court two-day hearing starting today over the legality of OMT.
Derek Halpenny notes the court has never ruled against any euro-zone process before and said it won’t happen this time either. The formal judgement is later in the year but like previously there may be some conditions stated after this hearing but any conditions will only be consistent with what the ECB already argues – that OMT is not about financing governments with solvency troubles. He feels this is unlikely to have much impact for the euro given the predictable outcome. His bank suspects that the current euro demand is probably emanating from the unwinding of long high yielding currency positions. Both the dollar and the euro were likely used as funding currencies for these positions and hence the euro is modestly out-performing the dollar. Once these positions are lightened he expects the euro to then start to drift lower versus the dollar.