Currency update – 15/06/2012

It is now official: Spanish borrowing costs now top 6.96 percent. Ten-year bonds in Spain have now hit their highest levels since the euro was adopted. This level had been previously marked by economists as the highest interest rate Spain could have before it became unsustainable. Italy and Greece both had to seek a bailout after they hit an interest rate higher than seven percent.

Investors are waiting until Sunday to fully decide their level of investing in the euro. This Sunday is the date when Greek elections are finally decided. If the wrong party is elected, Greece may choose to leave the European Union and stick to their austerity measures. Investors are hoping that the New Democracy party will be elected in Greece. The New Democracy group seeks to stick to bailout policies and remain in the Eurozone. If they are elected, it could provide additional relief to a battered European Union. Italian three-year bonds are currently trading at 5.3 percent.

Future Risks

In the next week, the markets will face a series of risks. On Monday and Tuesday, the G20 is set to hold a summit in Mexico. In addition, the Federal Reserve will also be holding a meeting on Tuesday and Wednesday of next week. With a weak American market, investors are still hoping for a round of quantitative easing by the Federal Reserve.

The United States fell against the euro for the third day in a row. Toward the end of the session, it fell slightly amid reports that central banks in Europe could increase liquidity in an effort to stop a potential squeeze on credit. The euro hit its highest level of the session at $1.2635 and ended up closing at $1.2631. This marks a 0.6 percent increase since yesterday.

The Bank of England announced on Thursday that it was ready to take action if the market worsened. It is prepared to inject funds into the banking system in order to get credit moving throughout the British economy. The government of the United Kingdom is ready to ensure long-term funding options for banks and encourage lending to borrowers. It has issued statements committing 100 billion pounds to ensuring its markets remain stable. After this announcement in Britain, sterling rose to a high of $1.5563. At the end of the day it was still up 0.3 percent to close at $1.5561.

Emerging Markets Stay Calm

For the majority of the day on Thursday, emerging markets remained relatively calm. Investors are afraid to make drastic changes before the election in Greece on Sunday. Early in today’s trading, Brazil decided to stop taxing foreign loans so aggressively. This move was met with little reactions in the markets. The real ended up rising to BRL 2.0574 per dollar which is up from its previous trades of BRL 2.0770 per dollar.

Other emerging market currencies like the Chilean and Mexican peso recovered losses by the end of the day. The only currency in Latin America to really improve was the Columbian peso. For the year to date, the dollar is down ten percent against the Columbian peso. In response, Columbia’s central bank has been trying to buy additional dollars in an attempt to weaken Columbia’s currency. Despite these efforts, exports and commodity prices have kept the Columbia peso at a respectable high.

Over in Europe, the Polish zloty, the Hungarian forint and the Czech koruna all rose against the euro. According to J.P. Morgan Emerging Markets Index-Global, emerging market debt is up 386 base points in comparison to United States Treasury yields.

Jobless Benefits Rise

Over the last six weeks, jobless benefits have risen five times. To make the situation in the United States worse, consumer prices had fallen for the month of May. Investors are currently speculating about the possibility that the Federal Reserve may step in to support the markets. Earlier this month, a statement by Bernanke before congress indicated otherwise. He reiterated his commitment to intervening if necessary, but did not believe it was necessary at this time. Next week’s meeting of the Federal Reserve may mark a change of course for the United States Federal Reserve Bank.

The euro is currently changing at 100.27 yen. If the yen rises any higher, Japan will experience a stronger export market.