Russia and China

The EUR/USD was up more than 70 points in early morning European trade after a report by Spanish paper El Pais suggested that Russia may consider buying Spanish bonds.  Russia Deputy Prime Minister Alexander Zhukov stated that, “"The success of Spain's recent debt issue has demonstrated confidence in its economy's growth and that has not gone unnoticed in Russia."

Mr. Zhukov’s comments came during a visit by Spanish foreign minister to Moscow and suggest that Russia may join China in helping to stabilize the euro which has been battered by sovereign debt concerns.  Although Russian foreign exchange reserves are a fraction of China’s, the country has generated  a significant surplus  of nearly half a trillion dollars that is presently being boosted by rising energy prices. Therefore much like China,  Russia is in a strong position  to utilize that surplus to diversify its holdings into euro denominated debt. 

The comments by Mr. Zhukov clearly carried a political as well as an economic overtone, as Russia just like China is loathe to see the euro lose its stature as a viable reserve currency alternative to the dollar. Neither the Russians nor the Chinese wish to see the return of dollar hegemony in the currency markets and today’s statements are a clear sign that troubled European peripheral economies may receive support from outside the Eurozone.

Whether Mr. Zhukov comments will have any long lasting impact on the currency market remains to be seen. Today’s conclusion of the EcoFin meeting is unlikely to result in any immediate progress on the EFSF front, with members unwilling to consider adding more capital to the fund until the next meeting in March. Nevertheless, Mr. Zhukov’s comments were a welcome vote of confidence for euro bulls and forced yet another short covering rally in the pair at open of today’s trade. The EUR/USD still faces massive resistance at the 1.3450 level, but if sentiment in the EZ credit markets continues to improve as result of today’s comments the pair could make another run at that key level later in the day.

FX360