Both the pound and euro hit 6 week highs against the US dollar yesterday as a measure of risk appetite returned to the markets with traders quietly confident that the euro zone summit on Wednesday will yield results.
Press reports on Monday suggested Germany wants to see the European Financial Stability Facility’s (EFSF’s) lending capacity increased to above €1 trillion as well as a restructuring of Greece’s debt. Today sees a crucial vote in the German parliament on the two options currently on the table to leverage the European Financial Stability Fund (EFSF). According to a document to which Bloomberg News has had access, the first would raise the EFSF’s capacity by insuring a fraction of countries’ funding requirements, and the second combines capital from European and non-European public and private investors.
This isn’t new but the document goes on to state that, “The capacity of the extended EFSF can be enlarged without extending the guarantees underpinning (…) the leverage which can be achieved can only be determined after dialogue with investors and rating agencies around the new instrument, and in the light of prevailing investor appetite over time for the sovereign bonds of particular member states.”
Bloomberg suggest the document simply underscores the gaps still present in the European strategy. Some market commentary seems to be attributing the slight selling pressure expected at the start of today´s session to the aforementioned.
At the euro summit, Germany and France continue to exert pressure on Italy to speed up economic reforms but Italian Prime Minister Silvio Berlusconi defended his government´s track record and credentials on economic policy, assuring investors that it is preparing to pass “important decisions” on structural changes in the economy.
In a statement issued on Monday night, the Italian Prime Minister said that, “Nobody in the EU can self-nominate himself commissioner and speak in the name of elected governments,” adding that, “nobody can give lectures (to other EU member states)”.
Away from the euro zone, slightly better than expected data from China and Japan suggested the world economy may after be on track for a sustained if slow recovery and this helped improve sentiment. Investors sought out higher yielding currencies such as the Australian dollar and South African Rand whilst so called ‘safe haven’ currencies like the US dollar and Japanese Yen lost ground. This may cool the rumours over the last few weeks that Japanese officials were preparing to intervene to cool the nation’s currency as it reached daily high’s on the back of the risk aversion theme which has largely dominated the markets since May but which makes exports more expensive.
