In US trade, the euro oscillated about the 1.23 level as the barrage of headlines out of the eurozone continued.
There was little reaction to news that EU finance ministers had granted Spain an extra year to reach its new deficit targets - from a projected 6.3% of GDP in 2012 to 4.5% in 2013 and 2.8% in 2014. In return, the Spanish government will reportedly pledge a €30 billion package of spending cuts and tax hikes (of which €10 billion will be targeted for this year). The news did little for the Spanish 10-year yield which edged back above the critical 7% level.
The euro is clearly being hampered by the apparent failure (or at least delay) to further build on some of the initiatives announced at the recent EU leaders’ summit – most notably the role of the ESM. Overnight, German Finance Minister Schaeuble sought to set the record straight by warning that it will ’take time‘ to establish a European bank supervisor for the ESM, and critically, only once this entity is fully in place would the door potentially open to direct bank recapitalisations. With the supervisory process still at least six months away from completion, there is a fear in the market that this initially welcomed initiative might be too late to help the likes of Spain.
Today’s spotlight will be on the German constitutional court, which will begin proceedings on whether the ESM is deemed ‘constitutional’ with the German law. A negative ruling here, though unlikely, would further damage sentiment towards the euro. Having ended yesterday’s Australian session around the 1.2290 level, the euro edged higher to close US trade at 1.2313. Upon resuming for Asian trade, the euro is marginally weaker but remains above the1.23 level.