Comeback kid

- "The Euro has staged a remarkable comeback over the last month, recovering from below 1.20 to the dollar to nearly 1.30. What has been driving it? Will it strengthen further, consolidate, or reverse trend? And should its appreciation be welcomed? There are several factors at work. The first is a paradoxical situation where, while the recovery is clearly more robust in the US than in the eurozone, the Fed sounds more dovish and seems to be toying with the idea of a renewed wave of quantitative easing, whereas the ECB sounds cautiously more optimistic and short term market rates have tentatively begun to edge up. Moreover, investors are
gradually gaining a measure of confidence from the policy actions of individual eurozone governments: nothing earth-shattering so far, but enough to raise hopes that policymakers have perhaps accepted the need to launch long-overdue fiscal and structural reforms. Spain is probably the best example. Most encouragingly, it seems that Asian investors, having done their homework over the last nine months, now feel more comfortable in assessing and taking on individual sovereign credit risk within the eurozone: demand at recent Spanish auctions is a case in point, and if this trend is sustained it would mean that risks of a systemic regional
debt crisis have substantially diminished. The make-or-break challenge ahead is the release of the stress tests, which begins in a week’s time. We should not get our hopes too high, as the very fact that we will initially get only the aggregate results for individual countries rather than individual banks tells us the first best is already off the table. Hopefully, however, the exercise will be handled professionally enough to avoid a major accident, in which case EUR/USD will remain stable in the coming months, to the satisfaction of both parties involved."
Unicredit Market Sense 20100716