Major Currency Pairs Analysis: August 14, 2012

The euro strengthened the most in more than a week versus the US dollar after Italy sold the maximum amount of treasury bills offered for sale, easing concern that the nation would be able to follow other nations in the periphery to seek financial aid. The country sold the 364-day bills at 2.8 percent up from 2.7 percent at the last sale of similar-maturity debt on 12th of July. Investors bid 1.69 times the amount of bills sold up from 1.55 times last month. At the end of the auction, it sold 8 billion euros or $9.9 billion immediately eased the slightly rising borrowing costs amid speculation the ECB’s plan to purchase securities from sovereign in debt won’t be adequate to grapple the region’s debt crisis.

As we recall, ECB President Mario Draghi opened the door earlier this month to buy Spanish and Italian securities, along with the euro area’s bailout funds. However, Spanish and Italian yields rose last week on concern that a debt-purchasing program won’t be sufficient to tame the crisis. Investors are well-informed that the plan offers an initial respite from the turmoil yet questioned its effectiveness. Italy remains in a precarious position.

Not only are there significant concerns regarding the credibility and effectiveness of a revived bond-buying program for Spain and Italy. Rome is increasingly wary of requesting external assistance because of the stigma attached to any aid program, Nicholas Spiro, managing director of Spiro Sovereign Strategy in London said. While Luc Coene, the institute’s Governing Council member and Belgian central bank governor expressed his worries in 11th of August regarding investors’ confidence would be difficult to maintain despite ECB’s bond purchase will take place.
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GBP/USD

Bank of England Governor King said the U.K. must press on with reforms to the banking industry and reiterated for the nth time his gloomy outlook for the euro-area debt crisis which impede British economy recovery. “If the rest of the world were growing normally, the rebalancing and recovery of our economy would be much easier. But it isn’t. Even the rapidly expanding emerging-market economies are slowing, and the problems of the euro area continue with no obvious end in sight”, King wrote in an article in Sunday newspaper. His comments came days after the Bank of England cut its growth forecasts and said the outlook is “unusually uncertain.” Additionally, Britain’s long-term economic performance will depend on measures such as reforming our banking system so that banks focus less on making money in the short term, and more on building businesses to serve their customers, he added.

The government plans to build a wall between banks risky trading on one side and their lending to businesses and families on the other will help. As will as the injection of new competition into our banking system. As recent scandals have shown banks could learn a thing or two about fair play from the Olympic movement. He is due to retire in June, and the Sunday Times reported yesterday that Chancellor of the Exchequer George Osborne will advertise for a successor after several candidates dropped out because of the Libor-rigging scandal. The remainder has been told that the post will be advertised in the fall and they should register official interest then, the newspaper said, citing an unidentified candidate.
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USD/JPY

Japans Gross domestic product added just 0.3 percent in the second quarter of 2012 compared to the previous three months, the Cabinet Office said in a preliminary reading, suggesting that the recovery from the March 2011 earthquake and tsunami remains stuck in neutral. Annually, Gross domestic product is also shy advancing 1.4 percent in June less than the median estimate of 2.3 percent in a Bloomberg News survey of economists and down from 5.5 percent the previous quarter, a Cabinet Office report showed in Tokyo. Factors affecting the slower economic recovery are Japan’s reconstruction-fueled rebound waned in the second quarter, consumer spending growth almost stalled and export gains diminished. Government incentives for households to purchase fuel-efficient cars have been supporting consumer spending which accounts for more than half of the economy.

Mizuho Securities Co. expects the program to expire this month, which may increase the nation’s reliance on overseas demand for growth. Prime Minister Yoshihiko Noda budgeted 19 trillion yen ($243 billion) for rebuilding from last year’s earthquake and tsunami. Furthermore, earnings from 2 of the biggest electronic exporters cut as yen advanced against the US dollar. Sony cut its full-year profit forecast on 2nd of Aug after gains in the yen eroding the value of overseas earnings. Canon, the world’s largest camera maker, also last month cut its full-year profit forecast because of a stronger yen and expectations for weaker growth in the U.S., Europe and China. Sony and Canon get about 70 percent and 80 percent of sales revenue outside Japan.
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USD/CAD

Canada’s dollar declined for the first time in six days against its U.S. counterpart as commodities fell and crude oil, the nation’s largest export, fluctuated after reaching more than $93 a barrel last week. The currency paused from the longest weekly winning streak since October 2010 after a rally in higher-risk assets had pushed the Canadian dollar to a three-month high against the greenback. It was down 0.2 percent at 99.26 cents per U.S. dollar at 5 p.m. in Toronto after touching 99.05 cents.

The loonie may appreciate to as high as 98 cents versus the greenback “over the next month, if not sooner,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal said in a telephone interview. Government bonds fell pushing the yield on Canada’s 10-year up two basis points or 0.02 percentage points, to 1.80 percent. The price of the 2.75 percent securities due in June 2022 declined 18 cents to C$108.50.
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