Investors Eye Central Banks – Bond Purchases to Help Eurozone

EUR/USD closed the week higher than opening on expectations the European Central Bank will tackle high borrowing costs hitting Spain and Italy, but the pair was capped at 1.2300 on market uncertainty about the specific action to be taken. European Central Bank President Mario Draghi said “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro; believe me, it will be enough”. The ECB reluctantly started buying Spanish and Italian debt in August last year as part of its bond purchase program. The buying had little lasting effect and the ECB suspended the program in March. His comments certainly suggest that ECB purchases of Spanish and Italian bonds are back on the table for discussion. This week the ECB President Mario Draghi will meet with the Bundesbank President Jens Weidmann to discuss several measures, including bond purchases, to help the eurozone.
Even though the heightened expectations about ECB intervention helped to push Spanish and Italian bond yields lower, fundamentally, there is a lot of uncertainty, and still a lot of unanswered questions as to how exactly the ECB plans to save the eurozone. Meanwhile, hopes that the Federal Reserve will act to support the U.S. economy also grew after data showed U.S. gross domestic product expanded at a 1.5% annual rate from April through June. However, it is clear that the Fed alone can’t restore confidence, can’t create jobs. U.S. Treasury Secretary Timothy F. Geithner will meet with German Finance Minister Wolfgang Schaeuble and European Central Bank President Mario Draghi in separate sessions on July 30.
Commodity Futures Trading Commission data showed that speculative traders decreased bets the euro will fall against the dollar. Speculative traders decreased their open short EUR position by 9% from a week earlier to reach a net of $23.4 billion. CFTC’s data also showed that traders increased their open short CHF position by 10% from a week earlier to reach a net of $3.3 billion. They also increased their open long JPY position by 128% to reach a net of $4 billion, the data showed.