Euro exchange rate today: Investors failing to account for risks facing EUR, relief as Spanish yields fall

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Published on Monday, 20 August 2012 08:41

Written by Sam Coventry

International Money Transfers at our sister site

"We think these risks are not adequately priced given the low level of implied volatility" - Sara Yates at Barclays.

The euro (Currency:EUR) is marginally higher this morning as a lack of bad news proves supportive. Indeed, the all-important yield on Spanish sovereign bonds has fallen - 10y bonds have seen yields fall from 6.49 pct to 6.31 pct on a daily basis indicating investors are a touch more confident this morning.

The euro dollar exchange rate is 0.14 pct higher on a day-to-day basis, EUR-USD is at 1.2350 at 9:30 in London.


The euro pound exchange rate is 0.07 pct higher at 0.7864.

While markets are doing fine today, September should see risks for the euro increase, and according to a FX analysis at Barclays, investors have failed to fully anticipate these risks.

First on the horizon we have the ECB policy rate meeting on 6 September.

There is the added a risk that EFSF aid will not be sought by Spain and Italy in coming weeks - further ECB action to support the Eurozone is dependent on either of these two countries requesting EFSF support.

Greece is also likely to return to prominence in September as the second bailout is discussed.

"We think these risks are not adequately priced given the low level of implied volatility. Therefore, while we see little to change sentiment next week, we recommend that investors take advantage of the low levels for EUR/USD risk reversals to build a EUR-downside position," says Sara Yates at Barclays.

The strongest performing G10 currency last week, however, was the EUR, which moved higher after German Chancellor Angela Merkel's reported support for ECB President Draghi bolstered market expectations of ECB action.

"But a necessary precondition is that Spain/Italy must request aid from the EFSF first. Our expectation is that they will, but that there is a low probability of a request coming from next Friday's press conference in Spain.  If it is sought, however, the increased certainty of ECB action coupled with a still substantial EUR short position held by the leveraged community is likely to see the EUR gap higher," says Yates.