Euro Mostly Lower as ECB Forecasts Additional Writedowns of 187 Billion Euros

Euro Mostly Lower as ECB Forecasts Additional Writedowns of 187 Billion Euros
The euro ended Friday mostly lower against the majors, though the currency did gain against the US dollar and Japanese yen after the German Ifo business confidence index rose more than expected to 94.7 in November from 93.9, the highest since July 2008. The shift suggests that demand has been picking up and output may increase further in coming months. On the other hand, the European Central Bank said in its Financial Stability Review that banks in the Euro-zone may have to write down an additional 187 billion euros due to "the further deterioration in commercial property-market conditions.” Furthermore, the ECB cited "the surge in government indebtedness" and the fact that some European banks are still reliant on emergency funding as risks to financial stability. Adding to this, downgrades to Greek government bonds have created a precarious situation for the ECB. Standard & Poor’s joined Fitch Ratings on December 16 in downgrading its debt to BBB+. If Moody’s follows suit with a cut to Baa1, down three notches from the current grade, pre-crisis collateral rules would stipulate that Greek bonds won’t be accepted by the ECB. Currently, they're in the clear as the ECB has been accepting bonds rated BBB- or higher as collateral in response to the financial crisis. However, if the ECB wants to go back to normalizing policy in the New Year, this may serve as an impediment to such a change or a very sharp blow to the fiscally challenged nation of Greece.

Related: Discuss the Euro in the DailyFX Forum,

US Dollar, Japanese Yen Modestly Lower Amidst Consolidations
The US dollar and Japanese yen were generally down against the majors on Friday, as the currencies consolidated Thursday’s gains and the DJIA and S&P 500 remained rangebound. There was no notable US economic news on hand, but there was Japanese news. Overnight, the Bank of Japan announced that they were leaving interest rates at 0.1 percent, but in a nod to the government’s calls for action to prevent deflation, the policy board stated that it will not tolerate a year-on-year rate of change in the CPI equal to or below zero percent.” 

Looking ahead to next week, US event risk will pick up on Tuesday, when the final reading of US GDP is projected to reflect an expansion of 2.8 percent in Q3, which would be the same as the previous result but would be down from the advance reading of 3.5 percent. A surprisingly strong result has the potential to offer a boost to risk appetite, but if GDP is actually revised lower, equities and the JPY crosses could break lower. Also on Tuesday, the National Association of Realtors measure of existing home sales is projected to rise by 2.5 percent to a nearly three-year high of 6.25 million for the month of November. This would mark the third month of growth after sales surged 10.1 percent in October, and as we’ve noted in the past, with the extension of the Federal government’s tax incentive for homebuyers to April 2010, upside potential remains for the housing sector as a whole.

Related: Discuss the US Dollar in the DailyFX Forum, Top 5 Events for the Week Ahead

British Pound Down Despite Signs of Improvement in UK Business Investment
The British pound was only able to make headway against the US dollar and Japanese yen on Friday despite some positive economic news. Total business investment in the UK only fell by 0.6 percent in Q3, compared to a 10.3 percent decline in Q2. The was the best reading since Q2 2008, when the index was still reflecting positive results, and bodes well for next week’s UK GDP revisions. The final reading of UK GDP is expected to be changed to a quarterly rate of -0.1 percent from -0.3 percent, while the annual rate may be revised to -4.9 percent from -5.1 percent as more recent output readings have been better than anticipated. That said, the British pound may only respond in a sharp manner if the quarterly rate of GDP growth is revised up into positive territory as the markets will price in the end of quantitative easing by the Bank of England.

In other UK event risk for next week, the minutes from the Bank of England’s (BOE) December meeting will be released on Wednesday, and while we already know that no changes were made to the Bank Rate or the Asset Purchase Facility (APF), the news could still impact FX trade. Indeed, the vote count may reflect some difference in opinion amongst the Monetary Policy Committee (MPC) members on the status of the APF, as BOE Governor Mervyn King has been more dovish in this regard in the past. Indications that some MPC members are in favor of further expansions to their quantitative easing program would likely lead to a steep drop in the British pound as it would cause traders to shift their expectations for interest rate decisions in 2010. However, the decision to leave the APF at its current level was likely a unanimous one, and thus, the British pound could gain.

Related: Discuss the British Pound in the DailyFX Forum

Canadian Dollar Gains with Oil, Wholesale Sales - Retail Sales Next Week
The Canadian dollar strengthened on Friday, thanks to higher commodity prices and an increase in Canadian wholesale sales. Indeed, sales rose for the second straight month in October at a rate of 0.3 percent, and combined with a 1.5 percent drop in inventories, the inventory to sales ratio eased back further to a one-year low of 1.31. The moves indicate that business conditions are gradually improving, and data due to be released next week may reiterate this sentiment. On Monday at 8:30 ET as retail sales for the month of October are due to be released. According to Bloomberg News, spending may have increased for a third straight month, this time by 0.7 percent. While Canada registered just over 43,000 job losses during October, the trend has been in favor of recovery since February 2009, especially since the net employment change surged by 79,100 in November. Likewise, Canada’s leading economic indicator has been on the rise over the past 5 months, suggesting that signs of growth throughout the economy may signal similar improvement in consumption. USDCAD has been trading within a range of approximately 1.0435-1.0745 since mid-November, but surprisingly strong or weak spending results could help break the pair from these parameters.

Related: Discuss the Canadian Dollar in the DailyFX Forum

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com