Despite the fact that the U.S. markets were closed yesterday in observance of Martin Luther King Jr. day, the U.S. Dollar advanced against the majority of its peers following a slew of E.U. related news. Reports indicated that aside from downgrading the credit of nine E.U. nations, the S & P reduced the AAA rating of the European Financial Stability Facility, whose role is to fund the bailout packages for Greece, Ireland and Portugal. Meanwhile, the Canadian dollar rallied versus the U.S. currency as crude oil rose 0.97 percent to $99.83 a barrel on the New York Mercantile Exchange.
The Euro declined for a second consecutive day against the U.S. Dollar, as investors grew increasingly concerned that the financial stability of the region may worsen. The shared currency dipped lower despite a decline in French borrowing costs. However, France only sold 8.5 billion Euros during yesterday’s auction, falling short of the target amount which was 8.7 billion Euros. And with the threat of a default by Greece, investors added to their record short positions on the Euro and sought the safety of refuge currencies, thereby causing the Euro to plummet to an 11-year low versus the Yen. Furthermore, it’s likely that Greece will resume talks with creditor banks on January 18th. Another meeting has been scheduled between the leaders of France and Germany, and there are two bond auctions scheduled in France and Spain. This will certainly test how the S & P has affected investor confidence. The Sterling has remained under pressure, although it traded a tad higher than the U.S. Dollar. Analysts believe the market has yet to respond to Friday’s downgrades and the Pound may react positively to the Euro’s woes. Because of the fact that the country is not part of the Euro region and it can exert control over its own fiscal and monetary policies, investors continue to view the Pound as relatively safe compared to the Euro.
The Japanese Yen gained against the majority of its peers as the Standard & Poors stripped nine E.U. countries of their credit ratings and downgraded the European Financial Stability Fund fueling concerns the fiscal turmoil will worsen.
Lastly, The Australian and New Zealand Dollars fell against the U.S. and Japanese currencies in anticipation of today’s economic reports which are forecast to reveal that China’s economy expanded the least in 10 quarters in the final three months of 2011. The South Pacific monetary units continued to decline after Asian stocks dropped following actions by the S & P. The Aussie continued to dip lower even after releases showed that Home Loans increased in the month of November.
EUR/USD- Bailout Fund Cut To AA+
The European Financial Stability Facility, which serves as the E.U.’s bailout fund, was stripped of its AAA rating by the Standard & Poor’s and was downgraded to AA+. This took place after the agency reduced the ratings of France and Austria, fueling concerns the debt crisis is worsening. In addition, Portuguese 10-year yields increased to a record against bunds. According to economists these are signs that the debt crisis has “further to run” and is far from over. However, rumors have it that the ECB purchased Italian and Spanish government bonds, a factor that may help the situation. Analysts also believe the markets will remain jittery and will wait to see what happens at this week’s debt auctions.
GBP/USD- Pound Trades Slightly Higher
The British Pound traded slightly above the U.S. Dollar while the 30-year Gilt yields dropped to a record low after France lost its AAA rating. The Sterling failed to increase as reports showed the U.K.’s Housing market is still under pressure. The Sterling was also weighed down by comments from Ernst & Young LLP’s ITEM Club wherein they stated that the U.K.’s economy has slipped into what looks like a recession.
USD/CAD- Loonie Gains On U.S. Growth
The Canadian Dollar gained against 16 of its peers on forecasts the nation will benefit in the export sector as the U.S. has shown positive signs of growth. The Loonie advanced in anticipation of today’s news which will reveal the Bank of Canada’s decision on interest rates. Canada’s Dollar traded at the highest price in one year versus the Euro as the demand for currencies from countries with healthy balance sheets increased. Today, Canada, Germany and Sweden are the only three nations with a AAA credit rating and this has caught the attention of investors.
USD/JPY- Yen Higher On S & P Downgrades
The U.S. Dollar fell against the Yen at the start of the week after the S & P’s downgrades prompted demand for safe havens. On the data front, Core Machinery Orders rose 14.8 percent for the month of November, more than what analysts expected. Earlier on Monday, Finance Minister Jun Azumi stated that he was increasingly worried about the drastic decline of the Euro indicating that the shared currency has been slipping too fast versus the Yen.
Today’s economic calendar shows that the U.K. will report on CPI and the Bank of England’s Governor Mervyn King is scheduled to deliver a speech. The E.U. will release data on Core CPI, the ZEW Economic Sentiment and CPI. Canada will publish figures on Foreign Securities Purchases and the Interest Rate Decision. Australia will issue the Westpac Consumer Sentiment. Japan will announce Industrial Production. And lastly the U.S. will release the NY Empire State Manufacturing Index metrics.