He notes that Euro weakness yesterday was at first triggered by a newswire report citing an unnamed ECB official stating that Spain is unlikely to request external aid before year end required to trigger the ECB’s OMT program to purchase short-term Spanish government bonds. The report also cited the official stating that they hope the commitment to purchase unlimited bonds will prove convincing enough not to actually require purchases. However, the house view at BTMU is that of being unconvinced.
He feels that the longer that Spain waits to request aid, the more likely that market pressure will eventually build up prompting an aid request triggering OMTs. It is an unstable near term equilibrium which will likely encourage downward pressure on the Euro until a Spanish aid request is imminent, driven by rising bond yields. Hardman notes that with the Spanish/German 10 year yields spread widening by 80bps over the past month, it is a trend which looks to already be underway.
Hardman continues to note that the Euro is also being undermined in the near term by complications over granting further aid to Greece given disagreements over the extent of debt relief now required to restore long term debt sustainability. He writes, “With outstanding debt now mainly held by the official sector, it has become more difficult politically to default on tax payer funds. As a result it was reported yesterday that the final decision to grant aid to Greece will be delayed and may now come as early as the 26th November.”
He finishes by noting that the euro has derived some support from yesterday's ECB meeting where President Draghi gave no clear indication of further monetary easing before year end, although he did acknowledge the weaker growth report.