The U.S. Dollar rallied after demand for an increased demand for safe havens and as investors sought the high liquidity of the American currency. Market sentiment gravitated towards risk aversion as a result of growing concern over the Euro region’s never ending debt crisis. In an auction of Italian bonds, borrowing costs rose the most since 1997 while the European Parliament prepared to approve a 30 billion Euro emergency budget proposal. Spain borrowed a record quantity from the ECB since September 2010. Other factors fueling demand for refuge included the possibility that France’s credit rating may be downgraded by two notches, which, according to economists, poses disastrous implications for its government’s finances. The markets tumbled following a statement by Federal Reserve Chairman, Ben Bernanke, indicating that the U.S. economy remains vulnerable to the problems of the Euro-zone, despite slight improvements in the employment sector. Chairman Bernanke went on speaking without mentioning the need for further quantitative easing in order to spur economic growth. The greenback rose again as the likelihood of further stimulus seemed to disappear. On the data front, MBA Mortgage Applications rose by 4.1 percent; the Import Price Index climbed by 0.7 percent. And out of China, metrics showed that its Exports fell by 2 percent per month, although the country claimed it would raise imports to combat the anticipated hike in “protectionism.” Meanwhile, the Canadian Dollar fell to its lowest price in two weeks versus its American counterpart on worries that the European borrowing costs will become unsustainable; this according to analysts, dampened demand for risk assets. The Loonie weakened further as crude oil, its biggest export, dropped to $94.87 a barrel in New York.
The Euro dropped below $1.3000 for the first time since January as Italy’s borrowing costs increased. The shared currency dipped versus the Yen on reports that Spain’s banks borrowed 98 billion Euros from the European Central Bank –the most since September 2010. This signaled that the country’s financial system is struggling to obtain its financing from other resources. The Euro was further weighed down by fears of downgrading which could raise borrowing costs for the entire region. Investors sold off the Euro on rumors that France may be the first one to experience a two notch credit downgrade. Pessimism took over market sentiment following an Italian auction during which the 5-year bond yields reached 6.47 percent, which was close to the dangerous 7 percent level. The Pound Sterling fell against the U.S. Dollar as global risk appetite dwindled on worries that the sovereign debt crisis may have sparked a massive credit downgrade after the disappointing outcome of the Brussels summit. The Sterling fared better against the Euro as investors sought the relative “safety” of the British currency. Purchases of British Gilts fueled the value of the Pound.
The Japanese Yen rose on heightened demand for refuge. However, the U.S. currency benefitted the most given its liquidity, while investors feared the worst, due to the rise in borrowing costs and the prospects of mass downgrades. The release of many economic reports was delayed and analysts expect low prints to fuel the Yen’s value as they will support the bleak outlook for the economy.
Lastly, the Australian and New Zealand Dollars dipped against the greenback on concerns over the Euro zone’s crisis, sapping demand for the riskier assets.
EUR/USD- Mass Downgrades Likely
The Euro continued to trade to the downside on growing concerns over the lack of progress in coming up with a solution to the debt crisis. Investors worried about the possibility of widespread downgrades after warnings from the Standard & Poor’s, Moody’s and Fitch ratings agencies. Economic reports failed to erase any of the losses as data revealed worse than anticipated slowdown in the region’s Industrial Production. The disappointing figures signaled that the Euro-zone may face a recession in addition to its already grave debt problems.
GBP/USD- Gilt Purchases Raise Value Of Pound
The Pound weakened against the U.S. Dollar as the rating agencies circled the E.U. member nations while considering serious downgrades. According to rumors, France may be the first nation to be downgraded which would bring about disastrous implications. Furthermore, a downgrade of the E.U. countries would cause borrowing costs to increase immediately. The Sterling was weak against the Dollar though it rose versus the 17-nation currency as investors purchased Gilts, stimulating demand for the Sterling. The British currency was also supported by favorable economic reports which indicated better than forecast Jobless Claims. Claimant Count fell to 5.0 percent and Jobless Benefits rose by a mere 3 percent. Weekly earnings showed a print of 2.0 percent. The positive metrics contributed to the Sterling’s rise against the Euro while the shared currency dipped below the $1.3000 level.
USD/JPY- Expectations On Tankan Survey
The Japanese currency increased as demand for risk assets faded away. Negative news out of Europe concerning possible downgrades continued to erode market sentiment. Several economic reports are due out, among these the quarterly Tankan Survey which is expected to drop. In addition, Non-manufacturing is anticipated to remain unchanged. If this is the case, analysts speculate the Yen may drop on indications the outlook for the economy remains less than positive.
USD/CAD- Loonie Drops On E.U. Concerns
The Canadian Dollar fell against the greenback following statements by the Federal Reserve Chairman dismissing the possibility of further stimulus. The Loonie slumped to the lowest price in over two weeks versus the greenback as European borrowing costs rose, dampening demand for risk assets. On the data front, reports indicated that Factory Sales dipped in October for the first time in four months given the decline in shipments by oil refineries. Data revealed that New Orders also decreased.
Today’s economic calendar shows that the E.U. will report on French Manufacturing; it will release the ECB Monthly Report, Services PMI, Manufacturing PMI, Core CPI, CPI, and Employment Changes. Switzerland will announce Industrial Production and the Interest Rate Decision. The U.K. will report CB Industrial Trends Orders, Nationwide Consumer Confidence, Retail Sales and Inflation Expectations. The U.S. will issue metrics on Current Account, Initial and Continuing Jobless Claims, PPI, Core PPI, Industrial Production, the Philadelphia Fed Manufacturing Index and TIC Net Long-Term Transactions. Investors will also focus on a speech to be delivered by ECB President Mario Draghi.