EU summit statements will put a floor to euro-dollar: Citi

It may be a baby step for the euro zone but is widely seen as a positive move towards a European banking union. European leaders have agreed to take emergency action to bring down Italy's and Spain's spiralling borrowing costs. The consensus saw the 17 bloc nations agreeing to create a single supervisory body for euro zone banks by the end of this year.

In an interview to CNBC-TV18, head- Asia strategy, Patrick Perretgreen of Citi says the latest developments from the two-day EU summit are positive for debt-ridden Spain. “The news that without preferential seniority status, the European Stability Mechanism (ESF) would be able to lend directly to recaptalise banks without increasing a country's budget deficit is also a good move,” he adds.

Perretgreen says these statements will put a floor to the euro-dollar’s moves ahead. Not just the euro; he thinks other risk currencies as well are going to do better for a whole variety of different reasons.

“For example we have turned quite bullish on the rupee in the past couple of days for different reasons but that will help sentiment as well. I expect to see broad risk currencies to be better over the next coming days,” he says.

Below is an edited transcript. Watch the accompanying video for more.

Q: Which part of the news coming in from the EU has the market liked the most today?

A: I think the news that Spain will not have the public lending will have the same spaces as private creditors. That is a major step because obviously one of the biggest concerns has been the subordination of existing owners of Spanish debt. The market has taken out the big positive. Overall going into this whole conference, people’s expectations of anything decent coming out are very low.

Obviously there are still a lot of issues to face up too but I think the lack of subordination is a major step forward. I think we are probably going to see that should also filter through some elation for Spain. It is going to be very interesting when we see European markets open later on to see just how the performance of the peripheral bond yields will be and what happens to bund yields as well. We could see very sharp moves on the bullish side.

Q: You track currencies very closely. What kind of reaction do you expect to see on the euro-dollar after what has happened already?

A: I think we have already seen a very sharp spike. There are almost two big figures. I think above 1.2630 was the high of the day so far. Basically that is going to put a floor in the euro for now. We are so used to these series of disappointments but just in general positioning, the risk is on the squeeze.

It is not just the euro; I think other risk currencies as well are going to do better for a whole variety of different reasons. For example we have turned quite bullish on the rupee in the past couple of days for different reasons but that will help sentiment as well. I expect to see broad risk currencies to be better over the next coming days.