Bloomberg News

Euro Drops for Second Week as Growth Concern Sparks Bond Selloff

May 17, 2014

The euro had the biggest two-week decline against the dollar since November as increased concern that the area’s economy is struggling to accelerate sparked selloffs in bonds issued by Greece and Portugal.

The yen rallied the most versus the dollar among the 16 major currencies as Japan’s economy grew at the faster pace since 2011, while the Swiss franc lost the most on speculation the central bank may raise its adjust its currency cap in response to any unconventional easing from the European Central Bank. India’s rupee topped gains in emerging-market currencies as Sonia Gandhi conceded an election to Narendra Modi’s opposition bloc before final results next week.

“The short-term community is definitely positioning, looking for downside in euro-dollar,” Richard Cochinos, the head of Americas Group of 10 currency strategy at Citigroup Inc., said in a phone interview. “The high-yielding and the peripheral debt have been really sold in the past few days.”

The euro fell 0.5 percent this week to $1.3694 in New York, making the two-week decline 1.3 percent, the most since the period ended Nov. 8. The common currency dropped 0.8 percent to 139 yen and reached 138.78, a level unseen since Feb. 12. Japan’s currency rallied 0.4 percent to 101.50, and touched 101.32.

Market Measure

The shared currency is down 1.4 percent this year among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen gained 3.1 percent while the dollar declined 1 percent.

Hedge-fund managers and other large speculators were betting the euro will weaken for the first time in three months. The difference in the number of wagers on a decline in the common currency, compared with those on a rise -- so-called net shorts -- was 2,175 on May 13, compared with a net long of 32,551 a week earlier, according to data from the Commodity Futures Trading Commission.

Japan’s economy grew an annualized 5.9 percent from the previous quarter, the fastest pace since 2011 as companies stepped up investment and consumers splurged before the first sales-tax rise in 17 years last month. The growth rate compared with a 4.2 percent median estimate in a Bloomberg survey of economists.

“To the extent that additional Bank of Japan easing is looking less likely since the GDP numbers have printed so strong, then that potentially removes one source of expected yen weakness,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney.

Rupee Gains

The rupee’s 2.1 percent advance this week to 58.7825 per dollar led the 24 emerging market currencies tracked by Bloomberg.

Poll results showed Modi’s opposition bloc was poised for the biggest Indian election win in 30 years. The victory of the Bharatiya Janata Party is a “game changer that creates the opportunity for a super-secular shift,” London-based Pacific Investment Management Co. fund manager Masha Gordon said.

“It’s an opportunity for change supported by a very large popular mandate,” Gordon said. “This raises the chances for more decisive policy action, which reduces the chances for a sovereign downgrade.”

The Swiss National Bank set a cap on the franc of 1.20 per euro in September 2011, citing the risk of deflation and recession. The central bank may consider moving the cap in response to any unconventional easing from the ECB in June, according to Nouriel Roubini, chairman of Roubini Global Economics LLC and a professor at New York University.

Swiss Outlook

“Our recent discussions with a senior official from the Swiss National Bank indicate that the SNB may consider increasing the euro-franc floor from 1.20 to 1.25 or even 1.30 in response to the expected rollout of further unconventional easing by the ECB in June,” Roubini wrote in a note to clients May 15.

The franc depreciated 0.7 percent to 89.27 centimes per dollar after touching 89.60 centimes on May 15, the weakest level since Feb. 13. Switzerland’s currency dropped 0.2 percent to 1.22242 per euro after touching 1.22299, the weakest since April 7.

The euro reached $1.3648 on May 15, the least since Feb. 27.

ECB President Mario Draghi signaled last week officials are ready to add monetary stimulus in June. A report this week showed euro-area gross domestic product rose 0.2 percent in the three months through March, half as much as economists forecast and matching growth in the fourth quarter.

Debt Yields

Greece’s 10-year yield rose 75 basis points to 6.86 percent this week amid concern political turmoil will derail reforms in the country that sparked the sovereign-debt crisis. Portugal’s 10-year yields added 20 basis points to 3.74 percent.

“The story is a bearish one for the euro,” Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA, said by phone. “There’s scope to build up euro shorts. We see the market starting to position that way starting last week.” A short position is a bet that an asset will decline in value.

U.S. jobs creation is “crucial” to the process of economic recovery and small companies “are responsible for a large share” of added employment, Federal Reserve Chair Janet Yellen said on May 15 in Washington in the text of remarks prepared for a speech to owners of small companies and officials from the U.S. Small Business Administration.

Minutes of the Fed’s April 29-30 meeting, when policy makers decided to pare their monthly bond purchases to $45 billion, will be released on May 21.

The Bloomberg Dollar Spot Index, which monitors the greenback against 10 major counterparts, was little changed at 1,008.12, after reaching 1,000.59 on May 8, the lowest level since October.

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Cox


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