According to a new survey by consensus economics, market participants expect EURNOK to strengthen to 7.70 within 12 months. No one expects EURNOK to rise above 8 within the next year.
“If this turns out to be correct, it would be very unusual given historical movement.”
Bjorn-Erik Rohne Orskaug
In Friday’s Morning Report Norway’s leading bank, DnB NOR, comments on the latest developments in the forex market. DnB NOR sees the Spanish government debt auctions and the stress tests of European banks as “positive signals,” but finds the result of a news survey of market participants expectations “remarkable.”
The financial markets were focusing on the Spanish government debt auctions and the stress tests of European banks, Friday.
“There were positive signals on both, which contributed to a further improvement in the market sentiment,” senior economist Bjorn-Erik Rohne Orskaug writes in a research note, pointing out that both U.S. and Asian share prices rose, and that the euro strengthened vs. dollar.
“Probably, the Spanish government debt auction contributed to both movements,” Mr. Orskaug writes.
Optimism Or Short-Squeeze?
The Spanish auction certainly contributed, but the question is; in what way?
Currency strategist Lee Hardman at BTM-UFJ has a slightly different view:
“The auction went reasonably well but with rising yields it’s not that much of a surprise. There are still worrying signs for Spain, particularly stresses in the Spanish bank funding market,” he says in a comment on Reuters. com.
“We think the euro rally is being driven by position adjustment rather than fundamentals in particular,” Hardman adds.
Traders said stop-losses placed above this week’s highs in the $1.2355/60 area were targeted and triggered in the wake of the Spanish auction.
Technical analysts at Commerzbank says the euro’s correction could continue towards resistance at $1.2445/1.2570 – the 2009 low and the 38.2 percent retracement of the move down from April to June.
According to Reuters, the euro has regained more than 500 points from a four-year low hit on June 7 at $1.1876, but is still down more than 13 percent year-to-date.
Remarkable EURNOK Expectations?
The Norwegian krone was approximately unchanged vs. euro, but strengthened vs. the dollar, Mr. Orskaug notes.
“According to a new survey by consensus economics, market participants expect EURNOK to strengthen to 7.70 within 12 months,” he writes.
“More remarkably, no one expects EURNOK above 8 within the next year. If this turns out to be correct, it would be very unusual given historical movements. Since the euro was introduced in 1999, EURNOK has traded above 8.00 within rolling twelve month periods 94 per cent of the time,” the Norwegian analyst points out.
Will EU‘s Stress Tests Calm The Market?
At Thursday’s EU summit, it was decided that the authorities will publish the results of the stress tests for Europe’s 25 largest banks.
The tests will be published by the second half of July.
“For those banks that do not pass the test, it is fairly likely that a back-up plan will be presented (e.g. recapitalization from existing shareholders or from the government),” Bjorn-Erik Orskaug at DnB NOR writes and explains:
“A major problem for European banks nowadays is uncertainty about which losses which banks will need to take and how much capital each bank has available to cover those losses. As long as this uncertainty persists, healthy banks are also hit in the way that financing becomes less available.”
“The question now is whether or not markets will trust the tests and whether or not it is enough to test only the 25 largest banks,” he says.
Mr. Orskaug realize that the stress tests are not enough to solve the problems in Europe.
“But it is another in a string of important measures that the EU has announced in the recent past,” he adds:
“EUR 750 bn. in a loan facility, apparently limitless purchases by the ECB of troubled securities, full allotment of liquidity in ECB auctions, fiscal consolidation which might hit economic growth in the short term, but which should contribute to more sustainable finances going forward, and extensive banking and labor market reform in Spain.”
“These are positive measures which have yet to have a profound impact on financial markets. However, perhaps the stress tests will contribute to markets turning more positive on Europe.”
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