The euro in free fall

The euro has fallen to two month lows against the US dollar and sterling, hitting $1.3066 and €1.1891 respectively.

A confirmed bailout package of €85billion has not managed to sooth the markets fears over the state of the eurozone as a whole. The issue has escalated so far that the single currency has fallen below its 200 day moving average and the next key target is €1.30. Investors expect further losses given the uncertainty surrounding the fiscal outlook of the regions ‘peripheral’ countries. With the state of the economies of countries like Spain and Portugal, it is hard to see light at the end of the tunnel. To put things into perspective, Spain’s economy is twice the size of Portugal, Ireland and Greece combined. A bailout package for the Spaniards would make anything we have seen so far insignificant.

With very little out this week from the UK, all eyes will be on EUR/USD, with the UK currency a mere spectator. Look for any bad news results from the eurozone and Friday’s Non-Farm Employment Change figures. Having heard very little of the results of the South Korean’s and the American’s sea trials over the weekend, an escalation in problems over there will only have a negative effect on the 16 nation currency.

Tom Hampton

Analyst – Caxton FX

The dollar heads yet higher

Sterling fell to its lowest level for one month against the US dollar, bottoming out at $1.5614. With very little data out today, the pound’s just a spectator to broader market flows into the US currency. Britain’s strong links with the eurozone, which is having another torrid day in the markets, aren’t helping.

The euro’s falling after a report in the FT Deutschland said the majority of eurozone nations and the ECB were urging Portugal to apply for a bailout. Borrowing costs for Europe’s most indebted nations are at a record high as concerns reach fever pitch over several EU member states. The average yield for 10 year bonds from Greece, Ireland, Portugal, Spain and Italy reached 7.56%, its highest level since the inception of the single currency.

The dominating theme in the markets at the moment is one of risk aversion. With South Korea and America flexing their muscles on North Korea’s horizon with a series of sea trials, fears of a full on war are taking their toll on the market. The greenback has soared to a seven week high against the Japanese yen and the euro, hitting Y83.95 and €1.3204 respectively. Until a calmer sentiment descends on the market, we can also expect to see higher yielding currencies taking a step back as they have today.

Have a nice weekend and come on England!

Tom Hampton
Analyst – Caxton FX

Déjà vu

With a quiet data calendar and little fresh news out the eurozone, today’s trading pattern smells very similar to yesterday. The euro has made up some of its lost ground over lunch, following a disappointing morning.

This morning, the euro traded near a two month low against the US dollar as rising borrowing costs in Spain and Portugal fanned the flames of concern that Europe’s debt issues will worsen. If the single currency has its fourth straight drop against the greenback, it would be its longest losing streak for three months. Reports that capital is leaving the periphery nations has put the 16 nation currency under even further pressure. The recent decline in Spanish bonds has come despite reassurance from the Spanish Deputy Finance Minister that the nations funding for the rest of the year is ‘comfortable.’ The fact that it has even come into question seems to be concern enough for the market.

The euro’s bounce after lunch could well be due to very thin trading volumes today as America loosens its belt in preparation for roast turkey and pumpkin pie. Happy thanks giving!

Tom Hampton
Analyst – Caxton FX

Euro extends its losses

Although the euro has regained some of the day’s losses, the single currency earlier fell to a two month low against the dollar, extending its losses caused by uncertainty over Ireland’s plans to tackle its debt problems as political unrest deepens. Uncertainties remain over whether the crisis in Ireland will actually be resolved as the IMF and EU try to reach an agreement with a government teetering on the brink of collapse.

Fears of the crisis spreading to other peripheral eurozone nations has reached fever pitch as concerns seem to have skipped the next logical step, Portugal and moved straight to Spain. A default from the Iberian Peninsula would dwarf anything so far as it is the continents fourth largest economy. Peripheral government bond yield spreads over Germany have widened as a result.

Another factor lifting the dollar is of course the unstable nature of relations between North and South Korea. A statement released from north of the border suggested that the two nations are approaching a state of all out war. This has only helped the so called ‘refuge’ currencies as investors look for safety until matters are resolved.

All in all, sterling is not a bad place to have your pennies in at the moment.

Tom Hampton
Analyst – Caxton FX

This ain’t no currency war!

There has been a definite shift in sentiment towards ‘risk off’ as news that North and South Korea exchanged artillery fire last night, causing the US dollar, Swiss franc, and Japanese yen to appreciate.

The dollar rose against all of its major counterparts, bar the Swissie, as North Korea fired artillery shells into South Korea near the border. As the South Koreans retaliated, demand for refuge currencies increased and higher yielding assets took a knock. The euro, which is already struggling due to the Irish debt crisis and a renewed bout of political turmoil, has fallen about a cent and a half against the greenback (currently trading at a 7-week low). With further concerns about to rear their head over the state of the Greek economy (the government is threatening to shut down in order to save money), problems in Portugal and a tough global fourth quarter in full swing, we don’t envisage a turnaround in this euro downtrend remain for some time yet.

In addition, expect to see more volatile assets such as the aussie, kiwi and rand remain on the back foot as this period of political and economical uncertainty prevail. The Thanksgiving holiday in the US is yet a further reason for investors to place it safe as they head into a long weekend.

Tom Hampton
Analyst – Caxton FX

Afternoon euro weakness

On a day with very little economic data, the euro has erased early gains following an initial agreement to rescue Irish banks to prevent wide spread ‘illness’ across the eurozone’s debt markets.

The single currency had reached a one week high against the greenback and ended a four week losing streak against sterling, hitting $1.3786 and £1.1606 respectively. The highs came after EU finance ministers said the deal will create a capital fund for Irish banks and is estimated to be worth about €90billion (rumours are abundant as you’d imagine).

Ireland’s request for a bailout makes it the second euro member to seek rescue from the EU and IMF. Speculation about the financial stability of other member states has led to fears that the single currency is in fact just a bankruptcy machine working its way through the region. This will of course be music to the ears of many euro skeptics (myself included) like the Swede’s whose national referendum stopped Sweden joining the common currency. How the powers that be ever thought so many individual economies could be brought together in harmony is/was ludicrous. Each economic area needs to retain certain elements of monetary policy to ensure the best possible trading conditions for their own economy. This may explain why in the early 2000’s, Germany’s economy was at its most sluggish since world war II, however, Ireland was deserving of the nick name the ‘Celtic Tiger.’ Who is roaring now?

Tom Hampton

Analyst – Caxton FX

The ridiculous euro

The euro is once again edging up against most of its major counterparts, recouping earlier losses on expectations that the Irish are near a deal with the IMF and ECB for a bailout package. Against the single currency the pound has fallen back below €1.17 , whilst the euro / dollar rate is holding around $1.3650.

It seems the market is unwilling to let the EU currency deteriorate despite all the problems facing it. Other than some non EU companies and countries making bad foreign investment, it is mindbogglingly frustrating. The structural problems facing the region at the moment start with astronomically high expenditure on social security. All those who go on strike because they refuse to work past the age of 45 are fanning the flames of a defunct banking system that is over-leveraged, governmental budgeting problems and national bankruptcies. Why can the market not see that the euro is a bankruptcy machine taking each nation down one by one? After Ireland comes Portugal, then Spain; bring on Italy next, and even the more securely financed structure of France could well have problems. If it was not for the frugal Germans propping up the continent, this would have happened a long time ago. The sooner these problems are factored into the market the better.

Phew! Now that is off my chest, I am wondering if the market or the euro is the more ridiculous?

Have a good weekend.

Tom Hampton
Analyst – Caxton FX

Sterling slips against the dollar

Sterling is down against a broadly firmer US dollar but remains at a seven week high against the struggling euro, currently trading at $1.6070 and €1.1820 respectively.

The greenback extended its gains from last week as better than expected retail sales data prompted a group of Republican economists to launch a campaign calling for the Fed to reduce its quantitative easing plan. The dollar index (a measure of the dollar’s value in comparison to a basket of currencies) hit a six-week high while the 10-year US treasury yield rose to its highest in two months and the 5 year yield rose more than 10 basis points (higher yield prices will drive up demand for US bonds).

Further concerns over the European debt crisis have sent the pound higher against the single currency today. Ireland is currently the nation under the kosh at the moment. It has been reported the Irish have rejected a bailout package from the ECB. The offer may still be taken up however, as Irish debt is currently running at over 30% of GDP, Anglo-Irish and Allied-Irish banks combined debt is roughly equal to a full years GDP. A statement from the emerald isle earlier today mentioned that they have enough liquidity to last ‘most of 2011.’ This does not sound like a long-term solution and some sort of bailout is surely necessary? (This could ironically be euro positive)

A raft of UK data out this week along with the B of E minutes from their November meeting could send the UK currency even higher as there will be very little support for further monetary easing.

Tom Hampton
Analyst – Caxton FX

Ireland’s potential bailout boosts the euro

Sterling fell against the euro today – ending a run of six straight sessions on the rise - following speculation that Ireland may soon have a bailout package agreed. The supposed bailout helped to dampen fears about debt problems facing the periphery eurozone nations.

Despite poor preliminary GDP figures from France, Germany, Italy and dreadful industrial production results, the euro still managed to regain some of its losses from the past few days to currently be trading around €1.1730 against the pound.

The one saving grace for the euro is whispers in the market about an €80billion bailout package for the emerald isle. However, Ireland’s finance ministry said chatter about a bailout was untrue, but traders said reassurances from the EU and G20 that bondholders would not have to take a write down on Irish debt helped the euro to recover. It was later reiterated by the European Commission that Ireland had not requested financial aid.

It is hard to believe that GBP/EUR would have such a big movement against the grain, simply because Irish bondholders will not be taking a hit due the economy’s fragility alone. This reassurance may set some minds at ease, but stagflation in Spain and less than convincing GDP figures would surely override this? Next week we could see a full bailout plan for the Irish government, conveniently to the same tune as Allied Irish and Anglo Irish Banks combined.

Next week, with another busy week of data to be published from the UK, we could see similar gains for the UK currency.

I hope we see England drive the Aussies over the try line of parity just like the greenback has done today. Come on England!

Tom Hampton
Analyst – Caxton FX

Sterling gets a ‘pick me up’

Sterling strengthened against all of its major counterparts, to hit a six week high against the euro and pass $1.61 against the dollar, following the Bank of England inflation report this morning.

The BoE revised up its outlook for inflation over the next two years, further reducing the chances of an increase in monetary easing. The bank adjusted its forecast, stating that inflation is likely to remain above the 2% target, possibly through until the end of 2012. With a VAT rise of 2.50% due on January 1st, a move to increase the asset purchase programme would put too much upward pressure on an already above target rate of inflation.

The report did still have the hallmark of a dovish Mervyn King, outlining the significant uncertainties that surround the UK economy and problems that it faces next year (not to mention the vicious government spending cuts). After all, a Japanese-style scenario still looms with the possibility of high inflation and low growth over the coming months/years.

In other news, the single currency is at its lowest figure against the greenback since May, proving that the new debt issues surrounding the eurozone are starting to take their toll. If the troubles continue to hit the headlines we could see investors run from the euro as we head towards Christmas.

Tom Hampton

Analyst – Caxton FX