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Published On: Mon, Oct 22nd, 2012

Euro Summit Concludes

During trading on Friday, the euro dropped against the United States dollar. The conclusion of the EU meeting in Brussels brought with few answers to dealing with the debt crisis in Europe. Earlier in the week, expectations of a bailout caused Europe’s currency to rise. As this sentiment abated and reality set in, the euro fell.

Summit Brings Few Decisions

On Thursday and Friday, key European leaders met to discuss ways to deal with fiscal problems and unite the European Union economically. The greatest outcome of the meeting was an agreement that the European Central Bank would eventually be in charge of all banking supervision for the Eurozone. European leaders have not yet set a timetable for implementing this plan or decided how the supervision would work in practice. Germany reasserted its decision to use the ESM and recapitalize European banks. Despite this decision, Germany is seeking to keep bad banks a domestic issue instead of allowing the cost to be foisted off to Europe as a while. Some investors believe that Germany is waiting to decide on further bailouts until elections are over at the end of the year.

Over the last week, ten-year bonds in Spain have risen. They are still 40 basis points lower than last week and easily below the 7 percent barrier. According to data coming out of Spain, the bad loan ratio has risen to 10.5 percent which is a new record high.  At the same time, elections are taking place in the Spanish regions of Basque and Galicia. In four more weeks, Catalan elections will also start. Depending on the outcome of the elections, financing costs may rise for Spain. The next meeting of finance ministers will take place in the middle of November. Some analysts believe that Spain will wait to request a formal bailout until this date.

On Friday, the euro was trading at $1.3021. This is a drop from the one-month high it hit on Wednesday of $1.3139. Overall, the euro is 0.5 percent up for the week versus the United States dollar. Europe’s currency also dropped 0.3 percent against the yen to 103.25. On Thursday, the currency reached a five-month peak versus the Japanese yen. The euro is up 1.6 percent for the week.

The greenback was trading 0.1 higher versus the yen at 79.31. It set a two-month high on Thursday and rose 1.1 percent for the week. This is the best weekly performance the greenback for over two months.

Japanese Yen Shows Signs of Activity

Over the last week, the Japanese yen has fallen drastically versus a basket of other currencies. Analysts expect that the Bank of Japan will start new fiscal easing measures in the coming weeks. On October 30, the Bank of Japan is planning on holding another policy meeting. In addition, investors are waiting for a future United States Federal Reserve interest rate decision. The yen/dollar exchange rate could also be further impacted by the announcement of third-quarter United States GDP growth.

United States Housing Market Up

The September report for housing is up. According to government data, the United States added 872,000 new single-family homes or apartments. Previously, analysts had expected this report to be around 770,000 units. Balancing out the increase in new dwellings was a temporary drop in the sales of existing homes. Despite the fall in re-sales, real estate data is higher than at any time since the spring of 2010. Some analysts already have stated a belief that the current growth cannot be sustained for long.

Part of the issue is that two million new homes have been created in the United States since 2008. During the same time period, household home ownership has dropped by 700,000. Based on current demographics, the economy could actually support an additional 1.6 million new units every year.

Canada Releases Household Debt

Last week, Statistics Canada released a revision of the National balance sheet data. This recently revised data showed that the household debt-to-income ratio in Canada was at 163 percent. Previously, Canada had reported their debt-to-income ratio at 152 percent. The new rate of 163 percent is higher than the peak reached by the United States prior to the recession. Bank of Canada Governor Carney stated last week that the Central Bank would try to reduce household debts by offering higher interest rates.

Canadian debt may resolve on its own as the mortgage market cools. Much of the additional household debt is caused by home mortgages. Since May, existing home sales in Canada fell by ten percent. In the upcoming quarter, Canadian economic growth is expected to hover under two percent. Although manufacturing shipments grew by 1.5 percent in the month of August, sales have remained constant since March.

Australian Dollar Drops

During trading on Friday, the Australian dollar fell by 0.4 percent. It is currently at $1.0324 which is a slight fall from the three-week high it reached on Thursday.

Emerging market currencies also dropped on Friday as investors sentiment cooled around risk. The lackluster results of the European summit showed that no debt resolution was in sight for European countries. In response, many investors sought out the safety of United States Treasury bonds and the dollar.

The Indian rupee reached a one-month low versus the dollar on Friday. One greenback purchased 53.84 rupees during the day’s trough. For most of the day, the Indian rupee remained at this level. Most analysts believe that it could break 54 rupees per dollar next week and cause a rebound.

In Chile, the peso dropped to CLP 474.70. Last week, the central bank in Chile chose to keep its policy rates at 5 percent. This expected decision was unsurprising to investors, but the currency still dropped as poor third-quarter revenue reports came out of the United States.

Interestingly, the Turkish lira managed to beat the trend for emerging market currencies. The central bank in Turkey chose to drop its overnight lending rate by 50 basis points. This rate drop to 9.5 percent is comparable to what other central banks try to do when they attempt to boost growth. The greenback is currently trading at 1.7948 lira.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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