Euro hits new lows on Ruble turbulence and expectations for quantitative easing

Enrique Díaz-Álvarez22/Dec/2014Currency Updates

Currency markets have been dominated over the past few days by the sharp gyrations of the Russian Ruble, and its knock-on effect on the rest of the FX universe. The drama around the Russian currency brought back memories of the 2008-9 crisis: wild intraday moves, desperate Central Bank interventions to calm markets, fear and alarm. By the weekend, however, the Ruble appeared to stabilise without the need for capital controls. Markets appear to have realised that Russian authorities are not without options. Their FX reserves, although down somewhat in 2014, still amount to over $400 billion, with another $180 billion available in two oil reserve funds, and funding needs for Russian entities (public and private) during 2015 are manageable. The Ruble is now trading higher than at the beginning of the week.

The Ruble crisis was not kind on the Euro. It triggered a so-called “flight to safety” effect, and traders fled to the traditional safe havens: Treasuries, Bunds and the US Dollar. The Euro performance was not helped by the developing political crisis in Greece nor the growing conviction that the ECB will respond to falling oil prices and the likelihood of negative inflation in the coming months by launching quantitative easing earlier than it expected.

We now move into what is typically the calmest period in currency markets, as traders and investors enjoy their Christmas holidays, liquidity dries up, and economic and political news are scarce. However, we are on the lookout for breaking news in two areas. First, December 29th is the deadline for the ruling Greek coalition to get 180 deputies to support the President election; failure to do so would prompt a general election which is likely to bring the leftist Sryza coalition into the Government, putting on the table a wholesale renegotiation of Greek public debt. Second, we are on the lookout for public statements from ECB Governing Council members validating market expectations for quantitative easing at the January meeting.

Either of these developments would exert downward pressure on the Euro. In the case of a Greek election, in particular, we think markets could see it as a potential spark for an anti-austerity political backlash in the Eurozone periphery, as Spain and Portugal are also due to call for general elections in 2015 in a context of general delegitimization of traditional parties. Should Greek parliament be dissolved in the last week of the year, we would expect the Euro to test the 1.20 level against the Dollar in reaction.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.