BLBG: Euro Declines for Third Day Before French, Italian Data
The euro fell for a third day against the dollar after the International Monetary Fund said Europe’s banks may need to sell more assets through 2013 if policy makers fail to stem the fiscal crisis.
The shared currency pared a drop to the lowest level in more than a week against the yen after French and Italian industrial production unexpectedly rose. Spain’s Prime Minister Mariano Rajoy meets French President Francois Hollande today in Paris as investors weigh whether the Iberian nation will ask for a bailout. South Africa’s rand surged as transport union members ended a strike. Japan’s Prime Minister Yoshihiko Noda said his government will act against disorderly gains in the currency.
“It’s not like we’ve gone into anything notable in terms of deterioration in confidence, but these issues are coming into focus and it does suggest the potential there for things to reignite in terms of Spain and the sovereign crisis,” said Derek Halpenny, the European head of global-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Over the short term, the upside in the current market environment of no news is limited” for the euro.
The euro weakened 0.2 percent to $1.2861 at 7:09 a.m. New York time, after earlier touching $1.2835, the lowest since Oct. 1. It declined 0.1 percent to 100.70 yen, after sliding to 100.44, also the least since Oct. 1. The yen was little changed at 78.29 per dollar.
Fiscal Tightening
Failure to implement fiscal tightening or set up a single supervisory system in the timing agreed could force 58 European Union banks from UniCredit SpA (UCG) to Deutsche Bank AG to shrink assets by as much as $4.5 trillion, the IMF said in its Global Financial Stability Report. That’s up 18 percent from its April estimate and would hurt credit and crimp growth next year in Greece, Cyprus, Ireland, Italy, Portugal and Spain, Europe’s so- called periphery.
In Greece, where the European debt crisis began, the government has been in talks with the so-called troika of the European Commission, ECB and International Monetary Fund for more than two months over a program of spending cuts.
After meeting Greek Prime Minister Antonis Samaras in Athens yesterday, German Chancellor Angela Merkel told reporters that while “a lot has been done, much remains to be done.”
Halpenny forecasts the euro will rise to $1.30 in one month and trade at $1.28 in three months.
Worst Performer
Spain’s economy minister Luis de Guindos said yesterday the nation will decide on the “sensitive” issue of a full bailout, taking into account the impact for the whole euro area. European Union leaders are scheduled to gather for a summit in Brussels on Oct. 18-19.
“We expect Spain to ask for aid before the EU summit,” said Yuki Sakasai, a currency strategist at Barclays Plc in New York. “The risk scenario is that Spain’s hesitance may spur a sell-off in its bonds and the euro.”
The euro has depreciated 5.7 percent over the past year, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 0.3 percent and the yen weakened 3.6 percent.
French industrial production rose 1.5 percent in August, from the previous month, when it increased a revised 0.6 percent. The median estimate of 21 analysts in a Bloomberg survey called for a 0.3 percent decline. Italian output climbed 1.7 percent during the same month. France is the euro area’s second-largest economy and Italy is the third-biggest.
Implied Volatility
Implied volatility among major currencies, which signals the expected pace of price swings, was 7.7 percent today, according to a JPMorgan Chase & Co. gauge of Group-of-Seven currencies. That’s up from an almost five-year low of 7.5 percent reached on Oct. 5. Increased volatility makes investments in currencies with higher key lending rates less attractive because the risk in such trades is that market moves will erase profit.
The yen advanced for a third day versus the euro as Noda said Japan’s government was taking a wait and see position on intervening in currency markets.
“We have to observe the market closely to see whether there are excessive or disorderly moves,” he said in an interview today at his office in Tokyo. The yen’s strength is a “serious problem,” is out of step with Japan’s economic performance and “when necessary, we will take decisive action,” he said.
Rand Rebound
South Africa’s rand climbed at least 0.5 percent against all of its 16 major peers after its biggest four-day sell-off in a year was seen as overdone and some strikes abated.
The rand weakened 6 percent between Oct. 3 and Oct. 8 against the dollar, dropping to the lowest level in almost 3 1/2 years, as strikes in the country’s mining and transport industries spread to other areas of the economy. The currency climbed 0.8 percent to 8.6865 per dollar today.
Australia’s dollar gained against all of its major counterparts but the rand after the nation sold its longest- dated debt in three decades.
“Demand for Australian bonds is supporting the currency,” said Lee Wai Tuck, currency strategist at Forecast Pte in Singapore. “But I think interest is still to sell the Aussie on rallies.”
The Australian dollar advanced 0.3 percent to $1.0236. It added 0.4 percent to 80.17 yen.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
