The Euro found an ally on lower EU peripheral bond yields and a successful Greek debt buyback program on Monday. The formal request by Spain for EU funds to recapitalize ailing banks also helped sentiment.
The committed bid tone in the EUR/USD has sent the spot price firm around 1.3050 after the first close above 1.30 handle since October 22.
Westpac FX strategist Sean Callow notes that after Greece launched a buyback of EUR 10bn bonds at a price of 34% (beating investors' expectations), "there was also an unexpected positive from German Chancellor Merkel who told a German paper that if 'one day' Greece produced a budget surplus, official holders of Greek debt might consider a haircut."
Downbeat economic data in Europe and the downgrade of the European Stability Mechanism's ratings by Moody's after the closing bell on Friday were two potential price movers being totally ignored.
Kathy Lien, Co-Founder at BK Asset Management outlines the reasons why investors are buying Europe: "Our primary argument is a reduction in tail risk or the risk of Europe's sovereign troubles wrecking renewed havoc on the financial markets."
Kathy expands: "The more than 10% increase in Greek Government Bond prices sent the EUR/USD soaring. As a prerequisite to receiving its next tranche of aid, Greece launched a program to buy back $13 billion or 10 billion euros worth of bonds from private investors and based upon the rally in the EUR/USD demand is expected to be strong."
The renewed optimism has prompted the Spanish vs. German bond yield spreads to narrow to its lowest in months. NAB strategists take a look at the relationship between EUR/USD and the Spanish-German/German-US yield spread, saying the correlation remains strong. "If these trends are maintained, it is realistic to think about EUR/USD re-testing the 1.3172 mid-September high in the coming week or so," the bank notes.
On the other side of the pond, a surprisingly 3-year low ISM index on Monday, down from 51.7 to 49.5, saw anti-USD flows entering the market, helping too the EUR/USD push north. Going forward, two events will dominate the US-related headlines for the remaining of the week, and potentially affecting the US Dollar value.
On one hand, investors will keep an eye on any headlines implying progress in the US fiscal cliff, while on the other hand, non-farm payrolls - due for release on Friday - and the inter-connections assumed between job growth and the next policy tools to deploy by the Federal Reserve, will be at the center-stage too. Additional asset purchases seems the safe bet, although there has been some contrarian comments from Fed Presidents over the weekend.
From a technical standpoint, in-house technical strategist Valeria Bednarik notes that "regardless the fundamental situation in Europe, there are no signs yet of a reversal or a top finally been reached in the pair, and even short term charts suggest more gains are yet to come..." The pair is developing inside an ascendant channel, she notes. "The base of the ascendant channel comes around 1.3030, and as long as above that level, bulls will lead the way," Valeria adds.
Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that further follow-through for a push towards 1.3140 seems logical. Alternatively, a break of 1.2935-50 would call this constructive view into question, he said.