By Candice Zachariahs and Masaki Kondo - Jan 16, 2012 8:41 AM GMT+0700
Jan. 16 (Bloomberg) -- Fabienne Keller, vice president of the French senate's finance commission and a member of the UMP party, talks about Standard & Poor’s decision to strip the country of its AAA credit rating for the first time. Keller speaks from Paris with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Jan. 16 (Bloomberg) -- Veronique de Rugy, a senior research fellow at George Mason University's Mercatus Center in Arlington, talks about European credit ratings and the outlook for the region's debt crisis. The euro weakened for a second day, reaching an 11-year low versus the yen, after Standard & Poor’s stripped France of its top credit rating and cut eight other euro-zone nations. De Rugy speaks with Susan Li on Bloomberg Television's "First Up."(Source: Bloomberg)
The euro weakened for a second day, touching an 11-year low versus the yen, after Standard & Poor’s stripped France of its top credit rating and cut eight other euro-zone nations.
The shared currency extended a six-week-long slide against the greenback before a series of debt auctions this week by European nations begins with France’s bill sale today. Greece may resume talks with creditor banks after failing to agree on terms of a debt-swap deal last week. The yen and dollar strengthened against most major peers as concern that Europe’s financial turmoil will intensify boosted demand for safety.
“Those downgrades provided another excuse for the speculative community to add to their short positions in euro,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “We’ve got a few more European debt auctions out there as market sentiment continues to be tested.” A short position is a bet that an asset will decline in value.
The euro fell 0.4 percent to $1.2628 at 10:39 a.m. in Tokyo from the close in New York on Jan. 13 when it touched $1.2624, the least since Aug. 25, 2010. The shared currency depreciated 0.5 percent to 97.06 yen after dropping to 97.04, the lowest since December 2000. The dollar dipped 0.2 percent to 76.85 yen.
U.S. markets are closed for a public holiday today.
France will auction as much as 8.7 billion euros ($11 billion) in bills today, followed by the European Financial Stability Facility’s 1.5 billion-euro sale of bills and Greece’s offering of bills tomorrow. Spain will also offer debt tomorrow and Jan. 19, while Portugal will sell bills on Jan. 18.
‘Nervous’ Markets
“Markets are going to remain pretty nervous” until we see the results of European bond auctions this week, said Michael Turner, a fixed-income strategist in Sydney at Royal Bank of Canada. “The yen and the dollar should outperform.”
European leaders are divided and falling behind in their response to the sovereign-debt crisis, Frankfurt-based Moritz Kraemer, S&P’s managing director of European sovereign ratings, said on a Jan. 14 conference call.
The euro dropped Jan. 13 before S&P lowered the top ratings of France and Austria one level to AA+, with “negative” outlooks, while affirming the ratings of countries that included Germany, Belgium and the Netherlands. The company also downgraded Italy, Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia by one level.
The loss by France and Austria of their AAA credit ratings may erode the firepower of the euro-region’s bailout fund that’s needed to tap markets to finance aid for Greece, Ireland and Portugal. The EFSF may lose its top rating if any of the bailout fund’s guarantors face a downgrade, S&P said last month.
‘Disorderly Default’
Talks between Greek Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos and Charles Dallara, the managing director of the Institute of International Finance, which represents private creditors, will resume Jan. 18, according to a Greek Finance Ministry official who declined to be identified. Greece’s creditor banks last week broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds.
“We remain concerned that Greece may suffer a disorderly default in March,” Mansoor Mohi-uddin, chief foreign-exchange strategist at UBS AG in Singapore, wrote in a Jan. 14 note. “A Greek default would have a major impact on the euro as it would spread contagion to other bond markets in the euro zone.”
Short Positions
Futures traders increased bets to a record that the euro will weaken against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise surged to 155,195 in the week ended Jan. 10, data from the Commodity Futures Trading Commission showed on Jan. 13.
The euro’s 14-day relative strength index against the yen was 26, below the 30-level that some traders see as a sign that an asset may be about to reverse direction. The RSI for the euro-dollar rate was at 32.
“Talks about S&P rating cuts had been around since last year,” said Toshiya Yamauchi, a senior currency analyst in Tokyo at Ueda Harlow Ltd., which provides foreign-exchange margin trading services. “Short positions on the euro have accumulated to the extent that there will be an unwinding of these positions to take profit.”
The Australian dollar weakened against 15 of its 16 major counterparts before data tomorrow that economists say will show China’s growth slowed in the fourth quarter.
Chinese gross domestic product rose 8.7 percent from a year earlier, the slowest pace since the second quarter of 2009, according to the median forecast of economists surveyed by Bloomberg News.
“A weaker-than-expected number would likely see a bit of pressure on the Aussie dollar,” said Jeremy Jukes, a foreign exchange dealer in Auckland at Velocity Trade Ltd., a currency brokerage. “A drop in GDP is probably not going to do the Aussie too many favors as China is Australia’s largest trading partner.”
The Australian dollar sank 0.5 percent to $1.0269, while the New Zealand currency lost 0.2 percent to 79.29 U.S. cents.
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net.
To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
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