The Pound is currently trading at 1.210 against the Euro after reaching a 15-month high of 1.211 earlier this morning. Safe haven flows are streaming in from the Eurozone as investors seek respite from the turmoil that has plagued the 17-nation bloc as of late.
The European Central Bank’s massive cash injection is proving effective at easing borrowing costs for Euro area countries; on December 21st the ECB supplied banks with €489 billion Euros in low interest 3-year loans. The initiative was designed to improve liquidity and help stimulate cash flow in the Eurozone. Fears that Banks would not reciprocate the ECB’s generosity were supported by figures detailing a record high €435 billion of Central Bank deposits. But the majority of Eurozone bond auctions have been successful since the cash injection and this suggests that they are making use of the improved liquidity. 2-year Italian yields have dropped by 50 basis points and 2-year Belgian notes have declined by 22 basis points since the loans were dished out.
Today, however, France sold €7.96 billion of debt at a higher borrowing cost; the government sold €4.02 billion of benchmark 10-year bonds with an average yield of 3.29% up from 3.18% at the start of December, and the bid-to-cover ratio (the amount of bids received for each unit of debt) fell by almost 50% from 3.05 to 1.64. Longer-term debt notes were also sold, maturing in 2023, 2035 and 2041; this was an attempt by the French government to prove to their investors and the rating agencies that they are economically secure.
The Eurozone is facing an increasingly real mass recession; the Euro has lost ground to the Dollar now for the 2nd year in a row – the first time that has happened in over a decade. Luxembourg Prime Minister Jean-Claude Juncker highlighted the severity of the situation yesterday: “The region is on the brink of a recession of which one doesn’t yet know its scope.”
Hungary has slashed its bond auction in half and the government has stalled discussions with the International Monetary Fund to make changes to the country’s central bank. The fear is that Hungary may default on its debt, thus putting more stress on the already fractured Eurozone. With Greek aid packages yet to be signed and tight austerity measures yet to be passed, the Euro is facing a very torrid time and could fall back even further than the 1.210 15-month low it is currently trading at.
