Published On: Sat, Nov 10th, 2012

Euro Hits Two-Month Low Versus Greenback

On Thursday, the euro dropped to a two-month trough versus the United States dollar. The European Central Bank decided yesterday to keep its interest rates at a record low. It also stated that the economy in the Eurozone was unlikely to recover before the end of the year.

At a press conference, the European Central Bank President Mario Draghi stated that the bank cannot do anything else to help Greece with its ongoing debt issues. As he reported the decision to keep bond rates at 0.75 percent, Draghi refrained from offering investors reassurance about the Spanish bailout. The lack of an outcome for Spain and Greece has beleaguered the marketplace in recent days and caused a 2012 one-day record drop for the Dow Jones Industrial Average.

Since August, the euro has risen almost four percent versus the greenback.  On Thursday, it hit a two-month low of $1.2716. It managed to recover to $1.2744 later on the day to end just 0.20 percent lower. The earlier fall in the euro marked its weakest level since September 7. Many investors expect the euro to return to the $1.24 to $1.25 range.
Figures showed that German exports fell at their fastest pace since last year. The data released on Thursday showed that the Eurozone’s largest economy is beginning to feel the strain of the debt crisis.

Dollar Index Rises

Against a basket of major currencies, the United States dollar rose. On Thursday, the dollar index advanced to a two-month peak of 81.001. It was last at 80.800 for a 0.005 increase for the day. With the United States presidential election fading into the past, investors are turning their attention to the fiscal cliff. On January 1, the United States government will enact automatic spending cuts and tax increases if politicians cannot agree on a budget resolution. Termed “the fiscal cliff”, these budget measures are widely expected to push the world’s largest economy back into a recession if lawmakers cannot agree on new measures.

Ironically, concern about the fiscal cliff has prompted some investors to seek safe havens like the dollar and United States treasuries. Overall, the government will face $600 billion in spending cuts and tax increases on January 1.
During the day, the greenback fell 0.76 percent to a rate of 79.38 yen. The dollar has managed to stay below a six-month peak of 80.67 yen that it reached last week.

Spanish Debt Auction

Some media outlets are reporting that Spain is trying to avoid requesting an international bailout in 2012. This report prompted some investors to sell off the euro aggressively. Spanish bond yields increased yesterday after the Spanish bond auction showed weak demand by investors. The sale managed to make enough money for Spain to continue operating through the end of 2012. Prime Minister Rajoy stated earlier in the week that the government was still studying the conditions of a bailout.

With this news on everyone’s mind, the euro fell to a four-week low versus the Japanese yen. It was most recently 0.94 percent lower at 101.19 yen. Earlier, Europe’s currency fell to 101.01. Versus the sterling, the euro hit a five-week trough of 79.58 pence. It managed to rise to 79.74 pence for just a 0.18 percent drop for the day. In the United Kingdom, the Bank of England chose to keep interest rates the same and has not changed its present asset purchasing program.

Chinese Stocks Remain Strong

Despite a pullback in the American stock markets, Chinese stocks have managed to remain strong. The iShares MSCI Emerging Markets (EEM) was just 1.2 percent lower for the month ending on November 7. During the same time period, the SPDR S&P 500 (SPY) was 4.4 percent lower. For the last three months, EEM has risen three percent while the SPY remained flat. About 18 percent of the EEM portfolio is Chinese.

For the last four weeks, the China Fund in the EEM was the third best-selling ETF. The iShares FTSE China 25 (FXI) advanced by five percent in the last few weeks and has raked in more than $1 billion. FXI hit a six-month high this week due to higher-than-expected corporate earnings and increased outlooks for the world’s second largest economy. After President Obama was re-elected, EEM fell during a two-day slide. Despite the drop, many investors expect that Obama will maintain asset purchases that can help the United States economy. He is viewed as more likely to do this than former challenger Mitt Romney.

Nigerian to Enter Bond Index

Barclays announced this week that about $14 billion in Nigerian debt could enter the emerging market government bond index in 2013. If this happens, Nigeria would become the second sub-Saharan country to be included on Barclay’s index. This decision follows a decision last month for Nigeria to be listed on the JP Morgan Government Bond Index. On the JP Morgan Index, Nigeria is expected to garner an estimated $1.5 billion.

To be included, Nigeria had to meet requirements on its market’s openness and size. Emerging markets must have at least $5 billion in debt that is still outstanding and have an accessible marketplace. The top producer of crude oil in Africa will become the 21st member of Barclay’s government bond index at the start of 2013. Nigeria is projected to have a weight of roughly 0.8 percent in the index. In 2009, South Africa joined the index and has a present weight of 5.6 percent.

Earlier in the week, Standard & Poor’s increased Nigeria’s credit rating from B+ to BB-. This increase bolstered the Nigerian bond market as Nigeria saw a rise in foreign exchange reserves in the African nation. The decision to increase the rating was driven partly by Nigeria’s reformation attempts in the power sector, its low debt and its decision to cut fuel subsidies.

Moody’s and Fitch also increased Nigeria’s credit rating recently. Overall, yield on ten-year bonds in the nation have fallen to 13.3 percent. On Wednesday, bonds were at 13.6 percent. Five-year bonds in Nigeria decreased by ten basis points to finish at 12.77 percent.

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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.