Published On: Sat, Dec 8th, 2012

Euro Falls as Draghi Maintains Interest Rate

The euro dealt with its sharpest decline of the month versus the United States dollar. This drop followed an announcement by the chief of the European Central Bank that it would downgrade the economic forecast and inflation expectations for the region. After the statement, expectations of an interest rate cut rose among investors. The president of the ECB, Mario Draghi, spoke at a news conference on Thursday about the ECB’s choice to keep the main interest rate the same. The bank also discussed the possibility of a negative interest rate. If this measure is adopted, it would encourage banks to lend cash to people in the economy and could jump start the recovery.

Along with the recent announcement by the European Central Bank, Mario Draghi also stated that the Eurozone economy would most likely sink again in the following year. Inflation and economic forecasts were lowered and GDP is expected to grow by only 0.3 percent in 2013. Inflation is forecasted to be at 1.1 to 2.1 percent. These announcements helped to fuel speculation over the euro and prompted some investors to switch to other currencies while the economic turmoil plays out.

In Italy, the political situation is rapidly driving bond yields higher. On Thursday, the leader of the People of Freedom party, Silvio Berlusconi, dropped his support for Prime Minister Mario Monti. This withdrawal of support could serve as a catalyst for early elections in Italy. Some market analysts believe that Italy could see its economy contract as much as 3 percent in 2013.

With all of the negative news out of the Eurozone, the euro dropped to a low of $1.2948 during the session. Most recently, it was 0.8 percent lower for the day at $1.2966. At this level, the common currency has sustained the largest percentage drop in one day since November 2. Overall, US$6.04 billion in euro switched hands during the session. Versus the yen, the euro fell 0.9 percent to reach a level of 106.80.

United States Dollar

Over the course of the day, the United States dollar dropped 0.1 percent to a level of 82.37 yen. It is close to its peak of 82.82 that it hit on November 22. November’s high was the peak level for the dollar versus the yen since April 2012. Most analysts believe the greenback will sustain this high. With an upcoming election on December 16 and expectations for fiscal measures by the Bank of Japan, the yen will remain under pressure for the next few weeks.

On Friday, the United States will release their nonfarm payroll report. Forecasters think that payrolls will show an increase of just 93,000 and unemployment will remain at 7.9 percent. In October, nonfarm payrolls were at 171,000.

The Australian dollar reached a 2-1/2 month high against the greenback after the release of jobs data. Currently, it is up 0.2 percent for the day at $1.0476.

The price for Australian bond futures prices remained roughly the same by noon in Australia. Ten-year bond futures were at 98.960 or a yield of 3.040 percent. Yesterday, the same bonds were at 86.955 or 3.045 percent. The December three-year bond futures contract remained the same at 97.400 or 2.600 percent.
Taiwan Dollar Falls

Widespread expectations of a central bank intervention caused the Taiwanese dollar to fall over the last week. In order to protect its export market, many investors believe the central bank in Taiwan will work to depreciate their currency. In November, Taiwanese overseas sales advanced at a rate 7.8 percent higher than in November of 2011.
By 10:11 a.m. in Taipei, one-month non-deliverable forwards dropped by 0.1 percent. They are currently at a level of NT$29.054 per United States dollar. Overall, the contracts have remained steady and are being exchanged in line with the spot rate of NT$29.071.

Taiwanese government bonds remained the same at 1.136 percent for bonds due in September 2022. At the same time, the overnight interbank lending rate was roughly steady at 0.388 percent.

Egyptian Pound Tumbles

On Thursday, the Egyptian pound dropped to its lowest level for eight years. Violence rocked the streets of Cairo as the political crisis spread. Some of the political issues are to be expected as Egypt struggles to create a democracy. The political situation may grow more intense as the International Monetary Fund gets closer to approving a $4.8 billion loan for Egypt. The funding measure is supposed to be voted for on December 18.

The Egyptian pound dropped to a level of $6.1319 versus the United States dollar. The last time it was this low was in 2004. At the same time, foreign reserves held in Egypt’s central bank dropped to $15.03 billion for November. This is the largest drop for over five months. Since the start of the revolution, the stockpile of foreign funds has fallen by over 50 percent.

Equities retreated by 4.6 percent to 4,838.51. This marks the largest intraday drop since the Black Sunday crash occurred two weeks ago. Nicknamed the Black Sunday, this crash occurred after new president Morsi decreed he could have powers above judicial review. Some opponents of his presidency have labeled this new decree as dictatorial.

Ugandan Bank Notes Change

Starting on March 30, Uganda will switch their currency from the current 1987 series of bank notes. Originally, the 1987 series was created to limit inflation which ranged as high as 300 percent in 1986. The bank will stop accepted the old versions of Shs1,000, Shs5,000, Shs10,000, Shs20,000 and Shs50,000 notes.

To carry out this measure, commercial banks will immediately cease to issue the 1987 series of bank notes. Consumers can still use the ones that remain in circulation until March 20, 2013. Until the last day the bank notes are in use, consumers can visit a bank to exchange bank notes. After March 30, they must visit a Bank of Uganda office. By December 31, 2013, they will no longer to be able to exchange the notes at all. Since Uganda often trades with its neighbours, it will notify surrounding countries of the new measures.

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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.