Euro Slides on Periphery Bonds’ Slump

The euro tumbled as a rout in bonds from the region’s periphery boosted bets the European Central Bank will expand stimulus that tends to lower exchange rates in order to quell the turmoil.

The dollar advanced against most of its 31 major peers as applications for unemployment benefits in the U.S. dropped. It plunged yesterday when a drop in retail sales prompted traders to cut bets the Federal Reserve will increase borrowing costs. The yuan rose to the strongest in seven months as the U.S. said China has shown “some renewed willingness” to let it appreciate. Australia’s dollar led declines among currencies of commodity-producing nations.

“It’s not helpful that there’s renewed pressure on peripheral sovereign bonds,” said Michael Woolfolk, a global-markets strategist at Bank of New York Mellon in New York. “Much of it comes amidst heightened risk aversion,” he said. “The euro is set to weaken as the European economy falls further behind the U.S.”

The euro slid 0.6 percent to $1.2759 at 8:57 a.m. New York time after climbing 1.4 percent yesterday, the steepest gain since July 2013. It slumped 0.9 percent to 134.83 yen. The dollar dropped 0.2 percent to 105.70 yen after falling 1.1 percent yesterday, the most since April 8.

ECB President Mario Draghi in Washington said on Oct. 11 that the central bank will use further unconventional monetary policy instruments if needed to support a recovery. The ECB has already implemented a negative deposit rate, offered cheap loans to banks and unveiled a plan to buy asset-backed securities.
Crisis ‘Everywhere’

“For a while now market prices have been allowing us to infer that the euro crisis was over, but actually we’ve seen signs of it everywhere,” said Jane Foley, senior foreign-exchange strategist at Rabobank International in London. “This adds to the pressure for the ECB to continue with extreme easing policies. Investors are reevaluating the periphery. That’s weighing on the euro.”

Greece’s 10-year yield jumped 109 basis points, or 1.09 percentage point, to 8.94 percent after rising 85 basis points yesterday. Spain’s 10-year yield climbed 13 basis points to 2.25 percent. Even France wasn’t immune to the selloff, with that nation’s 10-year yield increasing nine basis points to 1.23 percent.

“Periphery bond yields have really exploded,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “The worse that situation gets the more likely it is that the ECB has to do some more aggressive form of QE,” he said, referring to government bond purchases, or quantitative easing.

The Stoxx Europe 600 Index lost 2.1 percent, dropping for an eighth day in its longest slump in 11 years.
Bond ‘Liquidation’

“It’s partly down to liquidation of overseas investors in euro-zone peripheral assets,” Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London said, referring to the euro’s decline. “They are selling the euro out and repatriating.”

JPMorgan Chase & Co.’s Global FX Volatility Index increased to 8.56 percent, the highest since Feb. 6. The measure has increased from 5.28 percent in July, the lowest on record.

Speculation the U.S. central bank will raise rates next year had led to a record rally in the U.S. currency. The advance started to reverse last week after minutes of the Sept. 16-17 Federal Open Market Committee meeting showed participants said expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated.”

The currency plunged yesterday after a report showed a 0.3 percent decrease in U.S. retail sales in September, more than the 0.1 percent decline forecast by economists in a ForexSQ News survey.
Buying Opportunities

“The data that sparked the move was weaker than expected but overall data-wise, and as far as the growth outlook is concerned, the U.S. looks more favorable than elsewhere,” Ian Stannard, the London-based head of European foreign-exchange strategy at Morgan Stanley said, referring to the decline in the dollar yesterday. “We believe the overall dollar-positive trend is still very much in place. This should provide some renewed buying opportunities.”

Jobless claims decreased by 23,000 to 264,000 in the week ended Oct. 11, the fewest since April 2000 and lower than any projection in the ForexSQ survey of economists, a Labor Department report showed today.

Morgan Stanley predicts the U.S. currency will appreciate to $1.24 per euro by the end of this year, Stannard said.

In a twice-yearly report to Congress on foreign exchange, the U.S. Treasury Department said changes to China’s currency policy remain incomplete and the Asian nation should allow the market to play a greater role in setting the yuan’s value. The report covering the first half of this year concluded that no country was designated a currency manipulator.
Yuan ‘Undervalued’

The Chinese currency “remains significantly undervalued,” it said. The People’s Bank of China increased its daily reference rate by 0.1 percent to 6.1395 per dollar today, the highest since March 19.

“The lack of criticism from the U.S. may actually please China, which is happy to let the yuan gain a bit more,” said Daniel Chan, an analyst at Brilliant & Bright Investment Consultancy Ltd. in Hong Kong.

The yuan climbed 0.05 percent to 6.1231 per dollar, China Foreign Exchange Trade System prices show. It appreciated to 6.1209 earlier today, the strongest level since March 7.

Commodity currencies led declines against the dollar among the 31 major peers as West Texas Intermediate crude fell below $80 a barrel for the first time since June 2012.

Brazil’s real slumped 1.4 percent to 2.4924 per dollar. The Australian dollar declined 1.3 percent to 87.14 U.S. cents, while the Norwegian krone also dropped 1.3 percent to 6.6255 per dollar.

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