Published On: Fri, Nov 2nd, 2012

Nigerian Reserves on the Rise, Yen Falls

After the markets opened on Wednesday, the euro began to rise. Over the day, it gained 0.4 percent to reach $1.3014 versus the United States dollar. This marks the strongest level for the euro in almost a week. If it continues to rise, it could hit the October 25th high of $1.3023 or the mid-October high of $1.3140. The growth in the euro is attributed to an increase in demand from investors in the Middle East. Germany also posted higher-than-forecasted retail sales for the month of September. Presently, retail sales in Germany grew at their fastest rate since June of 2011.

Some of the rise in the euro can also be attributed to the recent hurricane that hit the United States. Shutting down large segments of Manhattan, Hurricane Sandy placed the New York Stock Exchange out of commission for two full days. This is the first time for the market to be shut for two days in a row since 1888. Once the marketplace is back to normal, investors will be able to see if the euro can maintain its current levels. Gains by the euro may also be limited as the days approach the expected month-end demand for greenbacks.

Any rise in the euro is also weakened by doubts over a potential Spanish bailout. If Spain officially applies for the bailout, the European Central Bank will be able to buy up its bonds and get the country to adopt austerity measures. A bailout would increase investor confidence in the euro and resolve many of Spain’s fiscal issues. Investors are also waiting for Greece to acquiesce to revised austerity measures and reforms. These two factors have kept the European Union’s currency at levels between $1.2800 and $1.3200 since the middle of September.

On Wednesday, finance ministers in the Eurozone are expected to hold a conference call. The goal of this meeting will be to discuss the Greek bailout and look at any progress made in negotiations. In order to keep the European Union and the International Monetary Fund happy, Greece must figure out a way to raise 13.5 billion euros through additional tax measures and spending cuts.

Manufacturing Data to be Released

On Thursday, the United States and China are supposed to release surveys of their manufacturing activity for October. The monthly United States job report will also be released on Friday. These three events have the potential to change the direction of the marketplace depending on if they show continued growth or decline. The upcoming United States presidential election on November 6 could also drastically impact the marketplace.

Yen Drops

After reaching a two-week high against the euro and a one-week high versus the greenback, the yen dropped on Wednesday. The United States dollar rose 0.2 percent versus the yen to reach 79.76 yen. On Tuesday, it had fallen to 79.28 yen. The temporary drop in the United States dollar is due to the hurricane in the northeast as well as to the Bank of Japan monetary policy meeting conducted earlier in the week. At this meeting, the Bank of Japan decided to conduct a further 11 trillion yen asset purchases. According to the BOJ, these policy measures will continue until short term inflation is at one percent. Recently, inflation rates in Japan have been at -0.4 percent and -0.7 percent.

Unfortunately, the recent actions by the Bank of Japan were less than what investors had hoped for. Despite the temporary rise in the yen, many see any gains as unsustainable. On Wednesday, the euro advanced 0.5 percent versus the yen to reach 103.67 yen. It was slightly off Tuesday’s trough of 102.175 yen.

In Australia, the central bank deputy governor stated that the Australian dollar is not overvalued. The deputy governor, Philip Lowe, asserted that it would take drastic measures for the central bank of Australia to intervene in the marketplace. Once this news came out, the Aussie gained 0.3 percent to reach $1.0384 versus the United States dollar. At the same time, the United Kingdom’s pound rose 0.25 percent to $1.6113 against the greenback.

Nigerian Reserves on the Rise

Foreign exchange reserves in Nigeria are 30 percent higher this year than they were in the preceding year. On October 29, reserves in Nigeria were estimated to be at a 32 month peak of $42.56 billion. From September 28 to October 29, foreign reserves in Nigeria increased by 3.4 percent. Africa’s top oil producer has not had reserves this high since February 11, 2010. Last year, foreign reserves in Nigeria were at a level of $32.72 billion.

CLS Sets Sights on More Nations

Central banks around the world are currently discussing the possibility of joining the globe’s leading company in foreign exchange settlement system. CLS Bank International is the largest system of its kind in the world and seeks to add the Russian ruble and China renminbi to its stash of currency trades. Over the next decade, the company wants to cut any systemic risk involved in trading foreign currencies. At this point in time, the group deals with currencies from 17 different nations. If their goals are achieved, they will deal with double the number of currencies within ten years.

Operating under the United States Federal Reserve Bank’s oversight, CLS is presently waiting for the Dodd-Frank act to be completed. This act is intended to create new rules that lower risk in the financial markets. CLS has long argued that they should be kept separate from these rulings since it has worked diligently over the years to lower systemic risk in the marketplace.

Despite their assertions, CLS has had to deal with incidents in the past that the Dodd-Frank act would have prevented. During the United States flash crash of 2010, CLS suffered through severe backlogs. Before CLS can continue with increasing its membership, it must obtain a trading exemption from the United States congress. Once this step is complete, the new CLS settlement system will most likely be modified to include a representative from each national central bank that participates.

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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.