U.S. trading markets were closed yesterday in observance of Labor Day. However, negative reports out of the Euro-zone bolstered further risk aversion and fueled renewed concerns. News that German Chancellor Angela Merkel’s party lost the elections caused the Euro to dip versus the U.S. currency. The fact that she lost in her home region heightened uncertainty and signaled that support is dimming for bailouts of the indebted nations. Other news weighing on the Euro came from the bond sector; Italian bond yields rose and the rates for the 2-year Greek debt surpassed the 50 percent level for the first time. Over the weekend, Mario Draghi took over as President of the European Central Bank, thereby replacing Jean-Claude Trichet. In his inaugural speech he left an unsettling feeling for investors as he indicated that the solvency of the sovereign states is no longer a given. Meanwhile, the Pound Sterling fell to a seven-week low versus the greenback as Employment Confidence sank for the month of August. This prompted speculation that the Bank of England may resume quantitative easing in the coming months and delayed the likeliness of an interest rate hike until 2013. With risk aversion, investors sought haven currencies. The Swiss Franc rose versus most of its peers as the two-year note yields climbed above 50 percent; in addition, the costs of insuring the Euro-zone’s government bonds from defaulting reached record highs.
The Japanese Yen strengthened against most of its peers as sovereign debt worries re-surfaced and demand for refuge increased. This took place as a lower than anticipated Euro zone PMI boosted yields on Euro debt, thereby causing them to reach unprecedented levels.
Lastly, the Australian and New Zealand currencies weakened the most in one week against the greenback and Japan’s Yen on renewed concerns that the European debt crisis is hurting public support for Chancellor Merkel’s party and causing banks to observe more stringent borrowing terms. Both monetary units slipped before reports indicating slower growth for the Euro zone.
EUR/USD- Merkel’s Party Loses
News that Angela Merkel’s party lost undermined the morale of the Euro-zone and put the region under added pressure. There are talks of bank funding problems and worries that the previous ECB President, Jean-Claude Trichet, is leaving at a time when he’s needed most. In addition, economic data revealed that Composite PMI dropped to 50.7 while Euro Zone Services PMI remained unchanged since last month. Retail Sales were not as disappointing, dropping by a mere -0.2 percent.
GBP/USD- Employment Confidence Slumps
The Pound Sterling weakened against the U.S. Dollar as risk appetite diminished significantly. In addition, U.K. data weighed further on the Pound Sterling as it showed that Services PMI dipped to 51.1 in August, continuing a downtrend. The British Pound had done well in the past few months since investors perceived it as a relatively safe currency. But this has now changed; and although the country retains its AAA rating, it’s likely that further easing may be likely since the focus is no longer on inflation but on employment.
USD-JPY- Big Week For Yen
This week promises to be important for Japan’s currency as the economic calendar shows a slew of data is scheduled to be released. Among the metrics, investors await the Bank of Japan’s interest rate decision, despite the fact that no major surprises are expected. Trade Balance is predicted to have increased and Machine Orders are forecast to indicate a slight decline.
AUD/USD- Currency Dips Most In One Week
The Aussie Dollar slumped the most in one week versus the greenback amidst worries over the Euro-zone’s sovereign debt crisis. In addition, a drop in Asian stocks weighed on the Aussie currency as investors are concerned that slower growth may hurt exports and commodities. The Central Bank is set to release its interest rate decision today; analysts expect rates to stay the same.
Today’s economic calendar shows that the Euro Zone will report on GDP and German Factory Orders. Australia will announce RBA Rate Statement while Switzerland issues CPI (MoM), Home Loans and GDP. Lastly, the U.S. will issue ISM Non-Manufacturing Index figures.