Euro drops amid renewed fears over debt crisis
Risk appetite started the week on a sour note and higher-yielding currencies extended losses suffered on Friday on fears of contagion in the euro zone debt crisis was the dominating factor as Spanish bond yields surged. On Friday, risk sentiment was weighed by Chinese GDP data which showed the second largest economy grew far less than expected in the first quarter of the year and a preliminary reading of consumer sentiment for April by the University of Michigan was lower than expected and eased from March’s final reading. Riskier currencies plummeted across the board versus the US dollar and the Japanese yen as forex investors favoured their perceived ‘safe haven’ status.
The US dollar was also lifted on Friday after inflation data from the United States came in line with expectations. The annual CPI reading was 2.7% in March from 2.9% in February, and CPI m/m grew 0.3% from 0.4% the previous month but both numbers were as expected by market consensus. Despite the data showed inflation grew at a slower pace, the Labor Department said the lower cost of living in the US was attributed to an easing in energy prices and this was highlighted by higher core CPI numbers. The data on Friday reinforced the view of some Federal Reserve members that inflationary pressures will eventually subside, but more importantly showed the Fed still had the freedom to manoeuvre and set its policy without external pressures.
EUR/USD plummeted more than 130 points on Friday from a high of 1.3201, as it failed to break higher than its 50 and 20-day moving averages at 1.3205 and 1.3210 respectively. It continued its decline earlier on Monday to trade below 1.3000, to 1.2995 as Spanish 10-year yields surged to above 6 percent amid growing fears that European leaders will not be able to stem the sovereign debt crisis.
The euro hit its lowest level since September 2010 against the British pound and fell for a second straight day versus the yen. EUR/GBP dropped to 0.8209 on Monday, more than an 18-month trough and EUR/JPY broke below its 200-day moving average, by 105.91, and hit 104.65. The single currency was also hurt by a report by the Wall Street Journal which reminded investors that rating agency Moody’s has ratings of some 114 European banks on review for a possible downgrade.
China widens CNY band
Over the weekend, the People’s Bank of China announced the widening of the USD/CNY trading band from +/-0.5% to +/-1%, effective as from today. The move was largely expected and is aimed at greater CNY volatility. This move should benefit commodity bloc currencies as it signals confidence in China’s economy. In fact, AUD/USD recovered to 1.0379 on Monday after falling to 1.0311 at the start of the trading session.
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