The U.S. Dollar weakened against high yield currencies as risk aversion tapered off on optimism that E.U. leaders are working to solve the sovereign debt crisis. The greenback slipped the most against the New Zealand Dollar, as stocks and commodities rallied on speculation that the People’s Bank of China may cut bank reserve requirements in order to bolster economic growth. This took place after data showed that the U.S. sustained the biggest imports slowdown in two years. The greenback slipped further before German Chancellor Angela Merkel met with the managing director of the International Monetary Fund, Christine Lagarde. The U.S. Dollar dropped to a three-day low against the Canadian currency after market sentiment turned towards risk appetite. In addition, crude oil prices surged as strikes in Nigeria, as well as tensions between the U.S. and Iran, added to a hawkish environment, thereby benefitting the Loonie.
The Euro started trading weak in the early part of the morning on fears of a Geek default; however, the currency quickly rebounded as Fitch Ratings indicated that Germany will not lose its AAA rating and neither would France or Austria. This was good news for the Euro region and eliminated another factor that weighed on the 17-nation currency. On the downside, Fitch Ratings indicated that Italy could sustain a two-notch downgrade. Other news suggested that Ireland would require a second bailout package and this fueled concerns, though they didn’t affect the currency. The Euro extended gains versus the U.S. Dollar in anticipation of a meeting between German Chancellor Merkel and the managing director of the IMF, Christine Lagarde. During the meeting, Greece will once again be the topic of discussion. Time is running out for Greece to pass the Troika test in exchange for another sum of bailout funds. The British Pound slipped against the high yield currencies on rumors that China will implement necessary measures to fuel economic growth. This caused stocks to climb and dampened demand for the “relative safety” of the Sterling. Gilts fell for the first time in almost one week before Germany’s leader met with the IMF’s managing director and amid optimism that E.U. leaders are working hard at solving the debt crisis. Another story taking center stage in the markets, given the lack of economic data, focused on whether the successor to the chairman of the Swiss National Bank would continue to support a weak Franc. Reports showed that the Franc gained against the U.S. Dollar and the Euro.
The Yen rose against the U.S. Dollar and the Euro as market sentiment prompted appetite for high yield assets in anticipation of a key meeting between Germany’s Chancellor Merkel and the managing director of the IMF. The subject of the meeting was mainly about another possible bailout payment for Greece, which has little time left to pass the Troika test in order to obtain the needed funds.
Lastly, the New Zealand and Australian Dollars advanced versus the greenback as stocks and commodities gained on predictions that China may implement measures to spur economic growth.
EUR/USD- France Breathes A Sigh Of Relief
The Fitch ratings agency announced that it would not cut France’s credit rating in 2012; it also indicated that the German and Austrian ratings were safe, but it would have to reduce Italy’s by two notches. Meanwhile, investors anxiously await the bond auction scheduled for Thursday, while borrowing costs remain dangerously high. The shared currency strengthened against the U.S. Dollar as market investors felt optimistic about the meeting between the German Chancellor and the managing director of the IMF. On the data front, French Industrial Production increased 1.1 percent, defying predictions there would be no change.
GBP/USD- Gilts Decline
The Sterling kept its gains against the U.S. Dollar as investors viewed with optimism the meeting between Germany’s leader and the managing director of the IMF. However, concerns over the E.U.’s banking sector persisted after reports indicated that deposits at the European Central Bank touched a new record of 481.935 billion Euros, signaling that the banks are still unwilling to offer loans to each other. On the data front, U.K. home prices dropped though at a slower pace but are expected to decline further. A separate report suggested that Retail Sales may continue to fall in 2012. Gilts declined for the first time in four days on speculations China will intervene to spur economic growth. The Sterling had declined as investors sought high yield currencies and shied away from the “relative safety “of the Pound.
USD/CAD- Oil Prices Benefit Loonie
The Canadian Dollar strengthened against the U.S. currency as domestic data and a hike in crude oil prices benefitted the currency. On the data front reports revealed that housing starts increased more than expected in the last month of 2011. According to the Canadian Mortgage and Housing Corporation the seasonally adjusted rate of housing starts climbed to 200,000 units in December, exceeding expectations. Meanwhile, a weak greenback boosted crude oil prices which traded at $102.89 a barrel in New York.
USD/CHF- Greenback Slips
The U.S. Dollar fell against the Swiss Franc as market sentiment shifted on optimism the U.S. economy is rebounding. However, investors remained concerned as the Euro region crisis rages on and Greece faces another battle before it can obtain its 8th payment. Speculation remains on whether the successor to the central bank’s chairman will follow the same policies to keep the value of the currency weak. The chairman of the bank, Philipp Hildebrand, resigned in the aftermath of a controversial trade made by his wife, weeks prior to the bank’s intervention in the market.
Today’s economic calendar shows that the E.U. will report on GDP. The U.K. will release the Trade Balance. The U.S. will issue data on MBA Mortgage Applications and will publish the Beige Book. Also, China may report on CPI and PPI.