.The euro rallied against most of its major counterparts on Friday after EU leaders agreed on new measures to cut rapidly increasing borrowing costs in Italy and Spain, in addition to directly recapitalizing regional banks. Eurozone chiefs also agreed that creation of a single supervisory body for the region’s banks. End-of-quarter portfolio adjustments helped fueling gains on Friday.
European Union President Herman Van Rompuy said officials meeting in Brussels agreed to drop the condition that emergency loans to Spanish banks give creditor governments preferred status. The move that we saw on Friday was a positive step by European leaders. It is not the perfect scenario, but it certainly exceeded the market’s really low expectations. Spain’s 10-year bond yield dropped to 6.33% and Italy’s 10-year bond yield slid to 5.82%. European bond yields will be closely watched this week. Spain will auction 3-year, 4-year and 10-year bonds at a primary auction on Thursday. France will sell between €7 billion and €8 billion in long-term bonds on Thursday.
However, I don’t think that what was announced is a big game changer at this point. There are still some structural problems that haven’t been addressed yet. Attention in Europe now turns to next European Central Bank meeting on July 5. The big question is still what direction the ECB takes next week. The consensus is that the bank will cut its main refinancing rate by 25 basis points to 0.75% to stimulate growth and bring down borrowing costs for Spain and Italy.
After two weeks of covering their short EUR positions, speculative traders on the Chicago Mercantile Exchange resumed betting on the euro’s fall, data from the Commodity Futures Trading Commission (CFTC) showed on Friday. Net EUR short positions were added by 18.8K to 159.9K. CFTC’s data also showed that traders increased their open short CHF position by 235% from a week earlier to reach a net of $3.1 billion. They also decreased their open long JPY position by 70% to reach a net of $714 million, the data showed.