FRX: Euro at September High, Yen at September Low as Euro-zone Summit Starts
By Christopher Vecchio, Currency Analyst for DailyFX.com
The third week of October hasn’t been kind to the US Dollar, which had been appreciating against its major counterparts ever since the Federal Reserve announced QE3, unlimited open-ended agency mortgage-backed securities (MBS) purchases, in mid-September. But as commented on yesterday in the DailyFX Real Time News feed, the Fed’s balance sheet is at its lowest level since June 2011, which means the $40 billion per month in QE3 hasn’t even begun.
As investors now prepare for the inevitable dilution of the US Dollar, risk-appetite has firmed on some improvements out of Asia and Europe. Chinese third quarter growth came in at its expected +7.4% y/y rate earlier today, boosting the commodity currencies but mainly the Australian Dollar. As noted below, this could market a near-term top (a few days maximum) in the AUDUSD, which is at a two-week high, now that the bullish catalysts are out of the system. Meanwhile, as political pressure builds on the Bank of Japan to implement more easing to help the economy spur inflation, the USDJPY has rebounded to its mid-September high near 79.20, providing a further boost to risk-appetite.
Elsewhere, as investors grapple with headlines out of Europe in regards to another Greek bailout and the first (of many) Spanish bailouts, the Euro has returned to its post-QE3 high at 1.3170/75 against the US Dollar. A Spanish bailout request this week, especially at the Euro-zone Summit, would be a major step forward for leaders and could mark a decisive shift in the crisis. Thus far, this has yet to happen, but we expect sentiment over the coming days to revolve largely around developments in this story.
Taking a look at credit, peripheral European bond yields are mixed, adding to the Euro’s indecision on the day. The Italian 2-year note yield has increased to 2.078% (+13.0-bps) while the Spanish 2-year note yield has decreased to 2.672% (-3.1-bps). Likewise, the Italian 10-year note yield has increased to 4.766% (+1.9-bps) while the Spanish 10-year note yield has decreased to 5.363% (-6.0-bps); lower yields imply higher prices.
