Poor Week for Euro, Good for Yen and Aussie

Euro losses have been extended.  It is making new lows for the week.  In fact, the single currency has traded below the previous day’s low for the seventh consecutive session. The slightly less than 1% decline on the week makes is the worst performing G10 currency.   There are three considerations

First, the Greek saga continues.  It again appears to be going down to the wire after it was acknowledged that a decision on aid is unlikely next week.   Greece looks like it will have to rely on T-bill issuance to secure funds necessary to meet the 4.0 bln euro redemption next week.

Second, Rajoy’s drama over formally requesting additional aid continues.  However, he did reveal the key determining issue and it was not the conditionality, but the extent of the ECB’s commitment to drive down Spanish rates.  He seems to appreciate what would be asked of Spain, what he doesn’t know is what it will get in return.  Moreover, even if the ECB does buy bonds, it may or may not be able to dictate the results. 

Third, the regional economy appears to have fallen off a cliff in September after some stability appeared in August.  German news began the pattern.  It reported weak orders data and then a 1.8% drop in September industrial output, more than twice the decline expected.  It also reported 2.5% drop in exports in September, the largest decline of the year.  The details underscore the weakness of the region.  Exports to the EU were off 7%, while exports to non-EU countries rose 1.8%.   

The German news has been followed today by news that French industrial output fell 2.7% in September.  The market had anticipated a 1% decline.  The fact the August rise was revised to 1.9% from 1.5% only serves to make the September decline more dramatic.  Italy too reported a 1.5% decline in September industrial production, which nearly offset the 1.7% gain in August.  On a year-over-year basis, not seasonally adjusted, Italian industrial output is off 10.5%.  

It is not just the euro zone.  Sweden followed the general pattern as well.  It reported a 4.1% decline in September industrial output.  The market had expected a 1.5% decline.    The August series was revised to flat from 0.4%. 

We have been resisting yen weakness (here and here), even though we recognize and have written about the deterioration of the economic conditions and the political paralysis.  Yet the speed of the yen's recovery has been unexpectedly dramatic over the last couple of days.    Yesterday snapped the five day streak that saw the dollar finish the North American session above JPY80.  The dollar has recorded lower highs since last Friday and lower lows since Monday. 

There appear to be three considerations behind the yen's recovery.  First has been the waning risk appetite illustrated by the slide in equities and the widening peripheral spreads in Europe.  Second, the decline in US yields relative to Japan also is support for the yen.  Third,  Japanese exporters had been previously sidelined and appeared to join the yen buying in the last few days. 

There is talk now of good dollar bids extending from JPY79.00-JPY79.20, which may be sufficient to stem further dollar losses ahead of the weekend.    That area corresponds to the 50% retracement of the dollar's gains from the JPY77.50 low on September 28.  

The Australian dollar remains resilient.  The RBA helped by keeping rates steady earlier this week and the employment data was also somewhat better than expected.   There was a challenge to the Aussie bulls at the start of today’s session when the RBA cut next year’s growth forecast to 2.75% from 3% as it expected investment in the mining sector to peak at 8% of GDP rather than 9%.  It also anticipates fiscal tightening over the next couple of years.   It did suggest that in order to meet its underlying inflation target next year, wage growth needs to moderate.   

Besides the yen, the Australian dollar is the only other major currency that has appreciated against the US dollar this week, gaining about 0.5%.  Support is seen in the $1.0350-80 area.   Lastly, we note that the Australian dollar’s correlation (60-day, percent change) with the S&P 500, a proxy for the risk-on/risk-off trade, is the lowest since April 2011, below 0.5.  It was above 0.8 as recently as late August.