Further Concerns Surrounding The Euro-Zone Structural Situation

Further Concerns Surrounding The Euro-Zone Structural Situation

by Darrell Jobman

 

The Euro pushed to highs just above 1.4450 in European trading on Monday as the US currency remained under pressure, but it was unable to sustain the gains and weakened sharply during the US session.

After further negotiations and some signs of dissent, the House of Representatives did pass the compromise budget deal which sanctions an increased debt ceiling. There will now be a vote in the Senate during Tuesday and the bill before being signed-off by President Obama. There will be further relief that a debt default has been avoided, but there will still be concerns over the possibility of a credit-rating downgrade, especially as there were no tax increases included in the plan. There will be strong political pressure on Standard & Poor’s not to downgrade the US rating and the agency may take some time to reflect on the situation.

The US ISM index for the manufacturing index was sharply weaker than expected with a decline to 50.9 for July from 55.3 the previous month and the lowest since June 2009.  The much weaker than expected data undermined confidence in the US economy and also had an important impact in damaging risk appetite. In this context, there were capital flows into defensive currencies, primarily the yen and Swiss franc, although the dollar also managed to gain some support now that the default risk had passed.

There were further concerns surrounding the Euro-zone structural situation as peripheral yield spreads continued to widen. Spanish benchmark yields rose to near 6.20% during the day while Italian yields rose to near 6.0%. There were further fears surrounding the European banking sector which also undermined sentiment. The Euro weakened very sharply to lows below 1.42 before staging a tentative recovery as volatility increased sharply.

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Yen

The dollar retreated steadily towards 77 against the yen ahead of the US open and the yen then spiked sharply higher following the US manufacturing data with a peak near 76.25.

Volatility remained a key feature and the yen weakened sharply to lows beyond 77.70 in Asia on Tuesday. There were rumours of intervention, but there was no confirmation from the Finance Ministry and the initial move may have been down to a large order, although this could have been orchestrated by the Bank of Japan

There were further warnings over intervention with Finance Minister Noda stating that markets were being watched very closely. There will be fears that the economy will be damaged by yen strength, but there will also still be defensive yen demand, especially if fears over the global economy increase.

Sterling

Sterling hit resistance above 1.6450 against the dollar on Monday and came under sustained selling pressure during the day.

The UK PMI index was sharply weaker than expected with a decline to 49.1 for July from a revised 51.4 previously and this was the lowest level for over two years.  There was weakness in all the main components which increased fears over the UK economic outlook, especially with orders and employment both below 50.0.

The IMF issued a generally downbeat assessment of the economy, although it also called for economic policies to be maintained.

The PMI releases for the construction and services sectors will be watched very closely and weak readings would increase fears over the economic outlook. There would also be further speculation over additional quantitative easing which would tend to undermine Sterling.

The UK currency was also undermined by a deterioration in risk appetite and dipped to lows below 1.6260 before finding support while it gained to near 0.8720 against the Euro.

Swiss franc

The dollar was unable to move back towards the 0.80 level against the franc on Monday and fell sharply to record lows below 0.7750 as the Swiss currency surged across the board. The Euro was subjected to extremely strong selling pressure and weakened to lows below 1.11 before recovering ground.

The weak US manufacturing data triggered a serious deterioration in risk appetite which increased demand for the Swiss franc as a sanctuary. There were also further concerns surrounding the Euro-zone banking sector which boosted franc demand.

National Bank actions will be watched very closely as domestic pressure for intervention intensifies and there will also be unease over the Swiss banking sector given the extent of liabilities.

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Australian dollar

The Australian dollar was subjected to further volatile trading during Monday as global volatility also surged. From highs above 1.1050, the currency weakened sharply to lows near 1.0920 and, after a recovery to the 1.10 area, there was fresh selling in local trading on Tuesday.

The Australian currency was undermined by a deterioration in risk appetite following the US data as fears over the global outlook increased.

The Reserve Bank of Australian held interest rates at 4.75% following the latest monetary meeting. There were concerns over inflation and the very high terms of trade, but there were also increased doubts over the growth outlook. The latest building approvals data was also weaker than expected with a further 3.5% decline for June which undermined sentiment.

Tuesday, August 2nd, 2011 Education, Stock Trading

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