"The EUR/USD is seeing an interesting surge after mixed US employment data shown the economy created more jobs than expected, while unemployment rate rose to 8.3%, finding also support on news EFSF is asking banks repo facilities," commented Valeria Bednarik from FXstreet.com. "Yields are falling in peripheral countries, and stocks strongly up across the board, putting pressure on the greenback across the board."
The European Financial Stability Facility (EFSF) has contacted members of its banking group for proposals on a series of credit facilities, Reuters reported Friday. The EFSF wants repurchase facilities, unsecured and secured loan proposals from banks.
"The plunge in peripheral yields is probably a function of the banks getting these requests from the EFSF grabbing some bonds in the market on the assumption that the EFSF will be buying a lot more, eventually", says Jamie Coleman, editor at Forex Live. "Bond yields are tumbling as the EFSF turns to banks to leverage that it may not be able to get from the ECB".
Meanwhile, the rally of the euro against the dollar found an interim top at the 1.2390 area where it peaked after rising over 210 pips throughout the day. However, as the week comes to an end, interest is fading following wild movements in the wake of major central banks decisions and the US nonfarm payrolls reports.
The most important indices in Europe closed with heavy gains. DAX has posted 3.93% increases, FTSE added 2.21%, Italian MIB jumped +6.34%, CAC 40 rose 4.38% and Madrid closed 6.00% up. Wall Street is closing also higher today with gains around 2.0% so far today.
Previous in this week, European Central Bank President Mario Draghi disappointed markets. Expectations were mounting on the possibility the bank would resume its bond buying program after Draghi said last week that the ECB would "do whatever it takes to preserve the euro". However those expectations were smashed after the press briefing, sending the euro and stocks lower and European sovereign yields higher.
"Whatever it means" well said Alexandra Estiot from BNP Paribas commenting the Draghi's speech. "Stress on sovereign debt markets has to be addressed and the ECB could help. But once more, the ECB through the ball back in the politicians’ court. A restart of the SMP is possible, but distressed countries have to request help from the EFSF/ESM first."
The moves came after Mario Draghi said the ECB may undertake open market operations within the banks mandate, such as buying bonds in secondary markets, and consider further non standard measures, but gave no detail on how and when these activities may be carried out. In other words, ECB says it is ready to use a 'bazooka', just not yet.
"It was good to hear that the ECB is open to step in the govie market with large purchases if needed, and give up its seniority status," points Marco Valli from Unicredit. "Less so that the reactivation of the SMP is conditional to forces that the ECB cannot control, and will target only the short end of the yield curve. On conventional monetary policy, the door for a further cut in the refi rate is wide open."
ECB chief also said that governments must stand ready to activate EFSF/ESM in bond market and reiterated the euro is irreversible. Regarding providing the ESM a banking license, Mr. Draghi said it is up to the governments, not the ECB, to take such a decision.
After Draghi's speech, Spanish president Mariano Rajoy and Italian prime minister Mario Monti commented in a joint press release, that they want a banking and fiscal union soon and their commitment to met budget targets but they didn't answer if they will ask for bailout.
On Friday, Rajoy also asked for an urgent summit and talks are speaking about September 3rd as the date, "Squeezed in between Jackson Hole on Aug 31 and the FOMC mid-month," as Adam Button from Forex Live Said. Rajoy also announced a 2-year plan to cut 100 Billions euro according to his 2013 and 2014 budgets.
"Chances are that Spain and Italy will now seek to sign a MoU with the EFSF/ESM," states Valli. "In our view, this will be pretty straightforward for Italy, while it might take some tough negotiations with Spain."
Rajoy declined to say if Spain will ask for EFSF support again on Friday. "We need to study that possibility" said Rajoy adding that He doesn't have any decision yet.
"What the ECB decided on (with a likely opposition from the Bundesbank) is that following the formal request from a country to the EFSF/ESM, it could add its weight in the buying programme to insure its success," continues Estiot. "But as stressed by Mr Draghi, this is a guidance, not a commitment."
"While implementation risks remain, we believe this sets the stage for an ECB involvement in supporting the Eurozone bond markets on a much more substantial scale than previously," remark Vassili Serebriakov and Nick Bennenbroek from Wells Fargo bank. "To the extent that ECB action would lead to a reduction in the European risk premia, the euro could see a relief bounce towards $1.26."
The TD Securities team looks "for a 25bps refi rate cut in September and another in Q4, a new 3y LTRO, and the potential for negative deposit rates if the macro environment deteriorates, and further bond buying of some ilk," according to a recent published report. "But it is clear these expectations will need to evolve with the mechanism once it is introduced."
Continue reading: The ugly and shocking Euro