Euro Near Two-Year Low Before Confidence, Inflation Data

The euro traded 0.6 percent from its lowest level in two years before reports this week that may show stagnating inflation and weakening confidence in the currency bloc as the deepening sovereign crisis curbs growth.
The 17-nation currency weakened versus most of its major peers after German Chancellor Angela Merkel said she hasn’t softened her stance on measures to stem debt contagion that’s prompted five euro states to seek international aid. Demand for the Australian and New Zealand dollars was supported as Asian shares rose and on prospects central banks will add to measures to bolster growth.

 

The euro was little changed at $1.2252 as of 8:31 a.m. in Tokyo after falling 0.3 percent last week. 

 July 16 (Bloomberg) -- Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., talks about the outlook for the pound, dollar and yen. He spoke July 13 with Bloomberg's Niki O'Callaghan in London. (Source: Bloomberg)

“The overall picture is still pretty cautious,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “There’s been a recession in the euro zone. I would still like to sell the euro on rallies.”
The euro lost 0.1 percent to $1.2241 as of 6:45 a.m. in London after touching $1.2163 on July 13, the weakest level since June 2010. It bought 96.82 yen, 0.2 percent below last week’s close. Japan’s currency added 0.1 percent to 79.10 per dollar after completing a 0.6 percent advance last week.
Figures from the European Union’s statistics office today may show the annual rate of inflation in the euro area remained at 2.4 percent in June, according to the median forecast in a Bloomberg News survey. That would be in line with an initial estimate on June 29 and unchanged from the reading for May.

Inflation, Confidence

A gauge of investor confidence in Germany, the currency bloc’s biggest economy, probably slid to minus 20 this month from minus 16.9 in June, a separate poll of economists showed. The ZEW Center for European Economic Research will release the data for its index of investor and analyst expectations tomorrow.
Merkel said yesterday in an interview with broadcaster ZDF in Berlin that a banking union involving a financial overseer for the euro area will have to include joint oversight on a “new level.” German lawmakers are scheduled to debate aid to recapitalize Spanish banks this week.
The euro has declined 4 percent in the past three months, the worst-performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen advanced 5.8 percent in the same period, while the dollar climbed 3.9 percent.
Europe’s shared currency may initially drop to a support level at $1.2151 and then toward the “psychologically important” $1.20 level, Mitul Kotecha, Hong Kong-based head of global currency strategy at Credit Agricole Corporate & Investment Bank, wrote in an e-mailed note today. Support is an area where buy orders may be clustered.

Euro Support

The $1.2151 level was last seen on June 14, 2010, according to data compiled by Bloomberg. The euro last touched $1.20 on June 10 in the same year.
Federal Reserve Chairman Ben S. Bernanke will discuss the outlook for the economy and monetary policy in testimony to the U.S. Senate Banking Committee tomorrow. He said on June 20 that policy makers will be prepared to take additional steps if necessary, including additional asset purchases.
Central banks in Brazil and South Korea lowered their benchmark interest rates last week, while the Bank of Japan (8301) unexpectedly expanded its asset-purchase program, its main monetary policy tool. The People’s Bank of China announced the second interest-rate reduction in a month on July 5. The European Central Bank cut its key rate to a record the same day.

Net Shorts

“On the one hand, global data is slowing but on the other, we are getting some offset from policy easing around the world, so that’s limiting the fallout in risk appetite,” said Mike Jones, a Wellington-based currency strategist at Bank of New Zealand Ltd. Investors are “extremely short euros, so from that perspective, markets are more sensitive to good news or even a lack of bad news.” A short position is a bet an asset will decline.
The difference in the number of wagers on a decline in the euro compared with those on a gain, known as net shorts, was 165,705 on July 10 compared with 146,177 a week earlier, according to figures from the Washington-based Commodity Futures Trading Commission. Traders have held net short positions in the shared currency since last August, the data show.
Even with the U.K. in its first double-dip recession since 1975, exports to Europe falling and the Bank of England adding to the supply of sterling, the pound rose 2.8 percent the past six months, the best performance in the Bloomberg Correlation- Weighted Indexes.

Pound Strength

The strength of the pound, boosted by investors seeking refuge from the turmoil in the euro area, is frustrating Prime Minister David Cameron’s plan to turn the economy around.
The pound was at 78.61 pence per euro today after earlier reaching 78.54 the strongest level since Nov. 3, 2008.
The Australian and New Zealand currencies maintained gains from last week as Asian stocks advanced.
The so-called Aussie bought $1.0221 after rising 0.9 percent to $1.0226 on July 13. New Zealand’s dollar traded at 79.58 U.S. cents after climbing 0.8 percent to 79.59 cents.
The MSCI Asia Pacific excluding Japan Index of stocks increased 0.3 percent. Japan’s financial markets are closed for a holiday.
The implied volatility of three-month options on Group of Seven currencies touched 9.06 percent, according to a JPMorgan Chase & Co. measure, the lowest since April 30. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profits.

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