It has so far been a rough 2011 for the euro and a respite next week will likely not occur given an avalanche of euro zone bond sales set to test the market’s resolve.
The euro fell 3,3% against the dollar this past week, its worst weekly loss since mid-August.
A total gross funding amount of 20-22 billion euros of issuance by Germany, the Netherlands, Italy, Spain and Portugal is set to hit the primary market next week, according to Norbert Aul, European rates strategist at RBC Capital Markets in London.
“This amount should feature the first real test of how peripheral EGB (European government bond) supply will be digested by the market in 2011,” he said.
In terms of peripheral bond issuance, next week will reveal Portugal’s funding capabilities at the capital market on Wednesday, while Spain and Italy will make their primary EGB market debut for 2011 on Thursday.
The spreads over Bunds of these issuers widened sharply this past week and weighed on the euro.
The level of yields offered on the peripheral bond sales next week should play a pivotal role in the direction of the euro. Higher funding costs should put added pressure on their already weak economies and heighten concerns about their ability to repay debt.
The widening of credit spreads and the rise in the cost of insuring euro zone debt against default clearly indicated the market’s growing unease, according to Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Esiner said market participants are nervous that upcoming bond issuances from peripheral euro zone nations, namely Spain, could result in disruptions in already turbulent credit markets.
“Any sort of lacklustre demand for the Spanish bonds and/or excessively high interest rates will probably keep funding issues at the forefront and add to the euro’s broadly heavier tone,” he said.
“Even if the sales fare well, any rally in the euro next week will likely be viewed as a selling opportunity by investors.”
In late afternoon New York trading, the euro was down 0,7% at $1,2912 on trading platform EBS, the lowest level against the dollar in nearly four months.
Barring negative US data next week, the euro seems poised to drop to $1,2850, Commonwealth’s Esiner said.
“The next target is around $1,2790, the 61,8% retracement of the euro’s June 7 low to its November 4 high, but that probably will not be reached next week,” he said.