EUR/USD
Germany and France’s drive to force Greece to honor its euro commitments risks backfiring on Chancellor Angela Merkel and President Nicolas Sarkozy. A week after the currency’s guardians declared for the first time that countries can be ejected from the 17-nation bloc, U.S. stocks tumbled on concern German politicians are already creating exit chutes for the weakest members. The sell-off suggests Europe’s crisis is spiraling into a new stage as investors bet on which countries are most likely to quit the euro, starting with Greece. The risk is that this will make it harder for debt-laden countries to convince investors they can get their finances in order and for policy makers such as Merkel, Sarkozy and European Central Bank President Mario Draghi to bolster the euro’s defenses. “This is a dangerous phase,” Neil MacKinnon , global macro strategist at VTB Capital in London and a former U.K. Treasury official, told Bloomberg Television’s “On the Move” with Francine Lacqua today. “All of a sudden, we’re talking about the future of monetary union in its current format.”U.S. stocks dropped late yesterday as news broke that members of Merkel’s ruling Christian Democratic Union party plan to debate a motion next week allowing countries to leave the euro region. The Standard & Poor’s 500 Index fell as much as 1 percent. In Europe, the Stoxx 600 Index has lost 2.6 percent in the past two sessions. U.S. stocks rose today after Standard & Poor’s confirmed its AAA rating on France.
GBP/USD
The Bank of England maintained its target for asset purchases as policy makers gauged the capacity of their second round of stimulus to ward off the danger posed by Europe’s debt crisis. The nine-member Monetary Policy Committee led by Governor Mervyn King held the ceiling for so-called quantitative easing at 275 billion pounds ($438 billion), as forecast by all 38 economists in a Bloomberg News survey. The bank, which expanded QE by 75 billion pounds last month, said the current purchases will take another three months to complete and the “scale of the program will be kept under review.”Europe’s debt turmoil has spread to Italy, further threatening Britain’s recovery, and the European Commission said today there’s a risk of a contraction in the U.K. economy in “at least one of the next few quarters.” The Bank of England may lower growth projections in its Inflation Report next week, which King will present at a press conference.“The contagion through to Italy will be very concerning for the MPC,” said Philip Rush, an economist at Nomura International Plc in London. The statement “leaves the door firmly open to extending QE at any point up through February.”The central bank also kept its key interest rate at a record low of 0.5 percent today, as predicted by all 52 economists in a separate poll. The pound erased its decline against the dollar after the announcement. It traded at $1.5958 as of 1:21 p.m. in London, up 0.3 percent on the day.
USD/JPY
Japan’s economy probably expanded at the fastest pace in more than a year last quarter, a rebound that may not be sustained as Europe’s debt crisis sends stocks plunging and boosts the yen. Gross domestic product grew at an annual 5.9 percent in the three months ended Sept. 30, reversing three consecutive quarters of contraction, according to the median forecast of 24 analysts surveyed by Bloomberg News. The Cabinet Office will release the report at 8:50 a.m. in Tokyo on Nov. 14. Resurgence in production and exports by companies including Toyota Motor Corp. is showing signs of waning as a yen trading near postwar highs against the dollar forces companies to cut their profit forecasts. A report on machinery orders yesterday indicated companies may pare spending into next year as they brace for a slowdown in global demand.“This is good news, but it doesn’t eradicate the uncertainties that lie ahead,” said Junko Nishioka , chief economist at RBS Securities in Tokyo and a former Bank of Japan official. “The rebound is going to lose momentum as sluggish overseas demand outweighs reconstruction -- we’re a long way from seeing a sustained recovery.”The Nikkei 225 Stock Average slipped 2.9 percent yesterday, the most since Aug. 5, after a surge in Italy’s bond yields stoked concern that Europe’s debt crisis is spreading. Recent reports suggest growth has already peaked. The government said yesterday companies plan to cut machinery orders this quarter for the first time this year, an indication they will trim capital spending. Industrial production fell 4 percent in September, the first drop since the March earthquake.
USD/CAD
Canada’s dollar rose from the lowest level in four weeks as the nation’s first trade surplus in eight months made the currency more attractive. The loonie , as the currency is also known, extended its gain on demand for riskier assets as Standard & Poor’s clarified an erroneous message on France’s credit rating, which remains at AAA. The U.S. trade deficit unexpectedly narrowed to the lowest level this year as exports surged to a record. “We have seen some clients nibbling at the Canadian dollar because it has sold off from the parity level,” Aaron Fennell, a futures specialist at Bank of Nova Scotia’s ScotiaMcLeod unit, said by phone from Toronto. “You need to see another couple of hundred points down further before you see any aggressive buying in the Canadian dollar,” he said, referring to another 2 cents of depreciation in the loonie versus the U.S. currency. Canada’s currency appreciated 0.8 percent to C$1.0169 per U.S. dollar at 5 p.m. in Toronto, after sliding to C$1.0266, the weakest level since Oct. 13. One Canadian dollar buys 98.34 U.S. cents. The currency has gained 0.2 percent this week. “We continue to feel that the broader technical picture is U.S. dollar-bullish,” Shaun Osborne and Greg Moore , currency strategists at Toronto-Dominion Bank’s TD Securities in Toronto, wrote in a note to clients today. “Intraday price action suggests a top in place for the market now at C$1.0265-C$1.0270, but we expect limited weakness overall. The market should remain well supported on dips from here.”
