- Crunch summit of EU leaders awaited by FX markets
- Issue of coronabonds still on the table
- United, credible response to boost Euro valuations
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The Euro was seen shedding value against some of its main rivals with the clock counting down to what amounts to a critical meeting of EU leaders which could well define the future structure and workings of both the Eurozone and EU as a whole.
Forget the incredibly dire data coming out of the Eurozone today - data which shows an unprecedented decline in economic activity during the March-April period - the foreign exchange market's real focus could instead lie with how Eurozone leaders attempt to fix the hole they have shot through the side of the economy with their salvo of lockdown measures.
Eurozone leaders meet over video link to thrash out a conclusive response to funding the fiscal support measures the Eurozone's economies require to not only lessen the impact of the covid-19 lockdown measures but to super-charge the recovery, when it arrives. A conclusive and credible agreement at today's summit could well spell for a more sustained recovery in the Euro, however analysts remain sceptical over the chances of such an outcome being agreed.
"An agreement remains highly unlikely for now given fierce opposition from Germany and the Netherlands. Indeed, reports suggest EU Council President Michel won’t even try to get the leaders to agree on a joint statement, so a deal is probably off the cards," says Marios Hadjikyriacos, Investment Analyst at XM.com. "That might imply more pain for the battered Euro."
The main question being asked of leaders today will be how to finance the proposed European Recovery Fund, a question they have been unable to answer for some weeks now.
"The EUR’s stability may be the calm before the storm, however, as we await (today's) EU meeting on COVID-19 aid financing where leaders are unlikely to agree on joint debt issuance, though some alternative means of financing could take the edge off Italian and Spanish debt," says Shaun Osborne, Chief FX Strategist at Scotiabank.
According to analysts the Euro has become increasingly stifled by the inability of Eurozone leaders to agree a joined-up financial response to the coronacrisis, with the disagreement not only hampering efforts but also shining a light on the Eurozone's structural political and fiscal weaknesses. Last week French President Emmanuel Macron spelled out what was at stake in an interview where he said the collapse of the EU as a “political project” was possible unless it supports stricken economies such as Italy and helps them recover from the coronavirus pandemic.
Macron said there was "no choice" but to set up a fund that "could issue common debt with a common guarantee" to finance member states according to their needs rather than the size of their economies. But such a fund is opposed by some EU states such as Germany and the Netherlands, creating a line of division right through the Eurozon's political core.
The Euro tends to come under pressure whenever questions about the Eurozone's unity and longevity are asked and 2020's crisis has done just that, with countries such as Germany and the Netherlands refusing to issue joint bonds to help fund recovery spending in hard-hit countries such as Spain and Italy.
But because the market's are largely sceptical on the ability of the Eurozone's leaders to find a solution to the question of funding, the potential for a positive surprise could have a sizeable impact on the Euro.
According to one analyst we follow, progress should be made by the EU's leaders and as a result the Euro exchange rate complex could find itself better supported over the short-term as a result.
"Apparently investors are doubtful whether the countries can agree on a stimulus package. I disagree; I think they’ll agree on what to do, just not on how to fund it. That should boost EUR today, in my humble opinion," says Marshall Gittler, a foreign exchange strategist at BD Swiss.
Gittler says there shouldn’t be any problem in finding the money, as Spain held its largest-ever 10-year bond syndication yesterday (EUR 15bn) and had a bid-to-cover ratio of around 6.5x, nearly double the previous record.
"This was similar to Tuesday’s successful sale of EUR 110bn in Italian debt, which also went well. With rates so low and the ECB pledging “whatever it takes,” investors are willing to buy the bonds if they can get a price concession," says Gittler.
Bloomberg reported that the European Commission would propose a €2TN plan that would use the EU’s multi-annual budget, plus a new temporary financing mechanism.
However this would involve issuing some joint debt – aka "corona bonds" – which the northern countries resolutely oppose.
"I don’t expect a full, detailed agreement today – Standard Operating Procedure for the EU is to kick the can down the road until the road disappears. In this case, the ECB’s debt purchases are enough to contain the market pressure on Italian debt for now, so there’s no need to tackle the politically poisonous question of burden sharing," says Gittler.
On 23 April 2020, the members of the European Council will meet by video conference to focus on the EU's recovery strategy.— Antonia Jakovcevic (@Antonia__J) April 21, 2020
The four priorities to be discussed by the #EU leaders:
#COVIDー19 #coronavirus #EU2020HR pic.twitter.com/voSW4uiAQf
"There’s also some question about grants, but then there’s going to be a debate on the ratio of grants to loans. In any event, watch for whatever details about the European Recovery Fund that do come out, such as the size, structure and speed with which it will be established," adds Gittler.
Ahead of the conference call, the Euro-to-Dollar exchange rate is quoted at 1.08, which is largely unchanged on the day while the Pound-to-Euro exchange rate is quoted at 1.1428, which represents a 0.25% advance on the day's open.
The pressure on Eurozone and EU leaders to agree a spending package that will help ease the pain of the current economic crisis is immense, a point pushed home by the slew of dire economic figures out of Europe on Thursday.
The Eurozone's Markit Composite PMI for April read at an unprecedented low of 13.5, a figure that signals a deep contraction in economic output is underway. The decline was driven by an eye-watering decline in service based activity, with the Services PMI registering at 11.7. The Manufacturing PMI meanwhile read at 33.6.
"If you had told an investor on 1 January that, within a few months, global PMIs would dive to a fraction of their previous level, they would have thought you mad. What is equally confusing perhaps is the way markets seem to have taken today’s incredible readings in their stride, or at least in a relatively calm fashion. But then it does not take a genius to infer from the film of deserted European capitals that activity has taken a hit to the solar plexus and will not immediately rebound. And with talk of a new ‘Marshall Plan’ for Europe doing the rounds stock markets are doing their best to 'look past' all the bad data," says Chris Beauchamp, Chief Market Analyst at IG.