Published On: Sat, Oct 27th, 2012

Emerging Markets Hit by Consumer Sentiment

As Wednesday’s trading session opened up in Asia, the United States dollar stayed near a three-month high versus the Japanese yen. Investors are speculating that the Bank of Japan may enact new fiscal easing measures. This hope for monetary easing has led investors to place their funds in safe havens like the greenback. The greenback was trading at 79.82 yen on Tuesday night which is close to Monday’s high of 80.02 yen. Monday’s peak exchange rate for the yen/greenback marks the highest levels for the United States dollar since early July of this year.

The Bank of Japan is expected to have a policy meeting next week that will discuss new ways to stimulate the export-focused economy. Ongoing riots in China and Taiwan over territorial disputes have weakened Japan’s export economy and caused the government to think of other stimulus measures.

In Australia, the Aussie gained 0.5 percent to reach $1.0315. This recent gain came after a survey of manufacturers in China eased investors’ fears about a rapid economic slowdown in China. In the last few weeks, investors have increasingly turned away from the Australian dollar due to speculation about potential rate changes. The news from China has caused many analysts to rethink this opinion and adjust their position on the Aussie. Data released earlier in the day showed that consumer prices in Australia grew by an unexpectedly large 1.4 percent. This growth in consumer prices also assisted in changing the market’s expectation of an Australian interest rate cut. Australia is expected to hold its next fiscal policy meeting in November. Inflation data is also expected to be released at 0030 GMT.

Euro is Steady

On Tuesday, the euro managed to drop to a low of $1.2952. The sudden drop was attributed to a downgraded by Moody’s Investors Service. Moody’s decided to downgrade five of the regions in Spain on Tuesday. This move caused Spanish bond yields to increase at the euro to temporarily drop. As of early Wednesday morning, the euro was steady at $1.2987.

Investors still believe that Spain will have to apply for a formal bail out at some point in the future. Over the last few weeks, this expectation has propped up the euro. Recent policy meetings and regional elections in Spain have caused investors to cut their expectations of a bailout in the immediate future. If a bailout is applied for, the European Central Bank will have to buy up Spanish bonds and prop up their economy. Since mid-September, Europe’s currency has been trading at $1.3170 to $1.2800. Most strategists believe that the euro will be able to find strong support at $1.2800. Any bailout request could also cause a temporary rally for the euro.

One negative side of any bailout package is the number of conditions attached. According to one of the European Central Bank’s executive board members, Benoit Coeure, the European Central Bank will not continue to buy bonds from countries that do not meet the attached conditions. This statement is worrisome for Spain and the Eurozone as a whole because it could make a bailout unappealing for Spain. Previously, Greece appealed for a bailout and was forced to use severe austerity measures. The various conditions attached to the bailout caused political and social upheaval in Greece that is still going on today. Spain may decide not to have a bailout if they can avoid it so as to limit the negative repercussions of austerity measures.

Canadian Dollar Rises

One of the few winners during Tuesday’s trading session was the Canadian dollar. Nicknamed the loonie, the Canadian dollar gained after reports from Canada’s central bank. The Bank of Canada announced that they would raise interest rates and had a positive expectation for economic growth. This surprisingly positive news caused an immediate jump in the Canadian dollar. Markets had previously had much lower expectations due to statements by Governor Mark Carney that appeared more dovish. During the trading session, the United States dollar dropped to C$0.9924. Previously, the greenback was at two-month highs of C$0.9976.

On Monday, the Australian dollar was trading at a two-month high of C$1.0286. Since then, it has retreated to C$1.0184.

Emerging Markets Hit by Consumer Sentiment

The drop in third-quarter earnings for United States corporations has managed to drive down overall market sentiment. Emerging markets were particularly hit hard. The greenback is currently trading at 12.9680 Mexican pesos. Stop-loss triggers for the peso are set at above 12.9350.

Lowered growth in the United States also contributed to losses for the South African rand. The United States dollar is fetching 8.7596 rand and is down 1.4 percent for the day. Speculations and hedge funds bought the rand at levels ranging from 8.740 to 8.79 while local stops are being triggered at 8.6850 rand per United States dollar.

Other emerging markets hit by lowered investor sentiment include the Polish zloty and Russian ruble. The zloty is getting close to 4.1450 per euro. If Poland’s currency reaches this key technical level, it will start a serious correction of exchange rates. It is presently trading at 4.1301 per euro. The Russian ruble also managed to drop nearly one percent during the day of trading. A two percent drop in oil prices catalyzed investors to turn away from the ruble. This marks the second day in a row that the ruble was sold off versus the United States dollar. Earlier, BP agreed to sell its stake in the company TNK-BP to the Russian-based oil conglomerate, Rosneft. Investors dropped the ruble amid expectations that large amounts of currency would be exchanged to complete the transaction. The latest trade for the ruble was at RU31.395 per greenback. It previously hit its weakest level for the month at RU31.5110.

During the day, the dollar index gained 0.4 percent. This index measures the greenback’s performance versus a basket of other currencies. It managed to reach a 12-day high during the session while riskier currencies dropped.

Interbank futures dropped their forecast for an Australian rate cut to 50 percent from two-in-three. The Reserve bank of Australia currently offers a 3.25 percent cash rate and is expected to meet on November 6 for a policy meeting.

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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.