By: Dr. Mike Campbell

Tis the season of low trading volumes which may account for the fact that the Euro has slipped to a ten-year low against the Yen and is at a one-year low against the US Dollar. The Euro is currently buying 100.4699 Yen and 1.2919 US Dollars. When trading volume is small a small number of large trades can have a disproportionate effect on the market as traders struggle to match up buyers and sellers.

From an economic point of view, Japanese exports to the EU are now at their most costly in a decade which is bad news for Japan since the EU is a major trading partner. The other side of the coin is that EU products on sale in Japan have not been as cheap for ten years. The negative impact of the weaker Euro is that raw material costs, which are mainly priced in US Dollars, have risen to their highest level for twelve months. However, the rate was just 0.9% lower than it was twelve months ago (during the Irish round of the sovereign debt crisis), so on a snapshot basis, this is not a huge problem. In contrast, the Euro has seen a fall of 7.1% over the last year against the Yen.

The Euro enjoyed better news on the bond market yesterday where the yield on Italian 6-month bonds halved to 3.25% from 6.5% in November. The Italians were able to raise €9 billion in the markets. The yield on 2-year bonds also dropped from 7.8% to 4.5%, allowing the Italian government to raise a further €1.7 billion. The more affordable rates were taken as a sign of confidence in austerity measures announced by the new Italian government.