When EUR/USD is close to reaching 1.3500 after falling to the 1.2000 area this year, you start to believe that the world is ending after all. I’m half kidding. Here are 4 possible reasons why the euro’s rally isn’t over yet.
1. Peripheral bond yields are still falling
The euro bulls have been on a rampage ever since Super Mario pledged to do “whatever it takes” to save the euro. It’s no surprise, then, that the 10-year Spanish bond yields have fallen by more than two percentage points from 7.67% in July to 5.30% a few hours ago. At the same time, Italian 10-year bond yields have dropped from 6.67% to 4.45%. What a coup!
Take note though, that nothing much has changed on the domestic front. Analysts are still expecting Spain to ask for a bailout and Italy’s political scene is as murky as ever. But for now, it seems that the markets are determined to overlook those concerns in favor of investor optimism.
2. Greece gets an UPgrade
How about that? Out of nowhere, ratings agency S&P decided to upgrade Greece’s debt rating by not one, not two, not three, but SIX notches! After sitting ice cold in the selective default region, Greece now has a rating of B-.
Talk about a major turnaround! Just months ago, there was speculation that if Greece didn’t receive any additional funding from the Troika, it would have to default on its debt. Worse, it would also be kicked out of the euro zone, which would have made it the first country to be forced to drop the euro as its currency.
The good news though, is that Greece was eventually granted its next round of funds. It is now scheduled to receive around 49.1 billion EUR over the next three months. Apparently, this is enough to get the S&P off its back for the mean time!
3. All eyes are on Uncle Sam
There are only roughly 12 days left before Uncle Sam faces the edge of the “fiscal cliff” and now investors as well as credit rating agencies are waiting to see if the U.S. politicians get their act together in time to avoid a crisis.
If the Democrats and Republicans can’t stop locking horns long enough to come up with a compromise that would satisfy market players, then credit rating agencies could soon downgrade the U.S. ratings and make debt more expensive for Uncle Sam. The prospect alone has already sent more than a couple of investors into the arms of high-yielding currencies especially the euro.
4. Early Santa Claus rally
For you newbies out there, lemme give y’all a brief explanation of the “Santa Claus” rally.
The Santa Claus rally refers to the year-end rally in prices that we normally see around the last week of December. Some reasons for the rise in prices include profit-taking, tax adjustments, or people investing their hard-earned Christmas season bonuses.
This surge in prices is normally associated with the stock market, but there are times when you can see the same happen in other markets as well.
For example, there could be some long-term traders who have maintained a short bias. Seeing as how EUR/USD continues to rally higher, they might finally decide to close their orders and jump aboard the bulls’ bandwagon!