The US dollar reached a 7 week high against the pound and a 6 week high against the euro as investors continue to seek comfort in its safe haven status.
World stock markets continue to plummet with London recording its eight straight day of losses and in Tokyo, the Nikkei hit its lowest level since April 2009. Worse still, a bond auction in Germany failed to attract adequate interest as less than €4 billion of the €10 billion got sold. German bonds, normally perceived as one of the safest investments in the euro zone now seem to be tarnished by the euro zone crisis. This is by far the worst received bond sale by Germany since the start of the euro. It stunned markets worldwide and sparked fears that the debt crisis is now contaminating the region’s biggest economy with dire implications for the euro zone.
A weaker than expected report on Chinese manufacturing also drove demand for safe haven currencies like the US dollar and away from the high yielding currencies like the Australian dollar and South African Rand. The pound reached a 2 year high at one point against the Rand. HSBC’s ‘flash’ manufacturing purchasing managers’ index fell to 48 in November from 51 in October. A measure below 50 indicates contraction.
The euro received some support yesterday after credit ratings agency Fitch reiterated its triple-A rating for French sovereign debt with a stable outlook. Fitch stated that the recent adoption of austerity measures “has enhanced the credibility of the government’s consolidation programme.” However, additional measures are still likely to be necessary “if the 3.0 percent of GDP [gross domestic product] deficit target is to be achieved by 2013, with Fitch projecting the deficit in 2013 to be around 4.0 percent of GDP.”
The agency expects France to have a peak debt to GDP ratio of 91.7% in 2014, a level that is consistent with the AAA rating.
Fitch explained that France’s triple-A rating is sustained by a “high-value added and diverse economy, broad and stable tax base and its commitment to deficit reduction and stabilising, and eventually reducing, public debt.”
Meanwhile, Greek politicians continue to work on securing the sixth tranche of international aid. According to Greek finance minister, Evangelos Venizelos, Greece will do everything possible to ensure it gets the sixth tranche of the European Union rescue package.
As well, Greece will have to announce new austerity measures for 2013 and 2014. Venizelos affirmed that the measures will be discussed as soon as the 2012 budget is approved.
The UK continues to fall away from the 8 month high against the euro, despite the ongoing sovereign debt crisis as UK economic data continues to paint a depressing picture. In a Reuters/Ipsos MORI poll, 58% of Britons believe that the UK´s economy will get worse over the next year. That is the highest figure since February 2009, when the UK was reeling from the effects of the global credit crisis.
The minutes of the Bank of England’s Monetary Policy Committee (MPC) meeting from the beginning of the month showed that all 9 members of the MPC voted in favour of maintaining the status quo on UK interest rates and asset purchases in November. The minutes held few surprises as policy makers chose a ‘wait and see’ approach. This came a month after they took decisive action and began pumping £75 billion into the economy through their quantitative easing (QE) program.
Dr Howard Archer, chief UK economist at IHS, said the minutes suggested that further QE was more likely than not, probably early in 2012.
There seems little chance of the end in sight to the world wide ‘doom and gloom’ so expect risk aversion to continue for the time being.
