Forex report: Euro under pressure

IB FX View: Euro schism

So far in 2010 global markets have been inching further forward by the day. Risk appetite keeps pulling through no matter what events are thrown at it. As the week draws to a close it’s the dollar index that’s on the rise, but not for the obvious reasons of vigorous economic recovery or the all too familiar risk aversion story. Rather the euro is coming under pressure as investors grapple with the possible ramifications of crippled public finances in Greece and whether this may spread to other countries. Earlier in the week, this threat seemed to have been brushed aside. But an overnight report from Time magazine crystallizing the domestic maelstrom facing German Chancellor Angela Merkel, culminated in market rumors expecting her imminent resignation. The euro is now under a form of risk aversion of its own.

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Euro – While a German government official was swift to deny the resignation rumors, the damage to the euro was already entrenched as Asian markets sent it headlong down the mineshaft triggering stops and encouraging model fund selling. Early in New York the euro was trading at $1.4380 and more than a cent lower than Thursday’s closing price.

Adding to the pain today was the voice of ECB president Jean Claude Trichet. Investors concluded after yesterday’s ECB press conference that they’d heard nothing new or at least worrisome from Mr. Trichet at the event, yet today he unleashed a fresh salvo of fears when he spoke about Europe facing a “major debt problem.” While it’s tempting to respond with the thought, “well, who isn’t?” the words have elevated the concern that the ECB is a little more worried than earlier felt.

His tone also reminds anyone outside the Eurozone that interest rates are not going up anytime soon given the cool nature of recovery and now the hamstrung Greek economy to tow behind it. This episode once again brings to the fore the potential for rising credit default swap rates and yield differential widening between core European debt and those of Portugal, Spain and Ireland.

Bearing testimony to this not being a risk aversion event, one needs only glance at the relative positioning of both Canada and Australian dollars, which have surged lately in response to confidence for the global uptick. Yet when we look at the euro today, it appears almost to be falling apart at the seams. At $1.4383 it’s down 0.9% against the dollar, while it has fallen further against the Japanese yen by 1.2% to ¥130.69. Against the pound sterling the euro is weaker by 0.7% at 88.24 pence.

It looks like Mr. Trichet’s age old and rather frustrated desire to cheapen the euro may finally be coming true. Today he again made reference to the benefits of a strong U.S. dollar – a card he often likes to play. I’m sure he’s not too displeased with this unintended side-effect of the problems playing out in Greece.

U.S. dollar – Today it’s not so much the case that the dollar holds more appeal; it’s a case that the euro is less appealing. The current high for the greenback at is at $1.4367 according to our data. Thursday’s slide in December retail sales hardly inspired the greenback and today we’re in store for another tepid consumer prices report no doubt. This will hardly be a catalyst for dollar buying except in the unlikely event that the report reveals a data outlier suggesting inflation is likely to scream off the charts – but don’t wait up just to see that event anytime soon.

Japanese yen –The yen rose strongly overnight as funds and model selling drove down the euro to ¥130.31, its lowest level in at least three weeks. The yen rose against the Australian dollar to ¥84.09 while against the pound it rose to ¥148.09.

Aussie dollar – The Aussie dollar was unable to breach the high-water mark set in the aftermath of the midweek domestic employment report having traded as high as 93.29 U.S. cents. It spent the remainder of Thursday heading sideways and lost its luster in Friday’s session as the shine was taken from risk appetite. Yet at 92.53 cents the Aussie remains reasonably close to its three-month peak at a little above 94 cents. Risk appetite for the Aussie stems from buoyant domestic activity but needs support also from developments in the United States. That was a little shy on Thursday in terms of that sub-par retail sales and the impact has been amelioration in investor appetite for Aussie dollars.

Canadian dollar – The Canadian dollar is a little lower overnight but there’s no escaping the fact that it’s in current demand, perhaps as an alternative to the U.S. dollar. At 97.50 cents the loonie is more than half a cent higher than 24 hours ago, which illustrates Thursday’s late in the day surge. Interestingly, the traditional drivers of Canadian dollar strength are movements in the base metals and energy complex. Energy prices continued to fall yesterday and today with crude oil looking comfortably below $80 per barrel now that the coldest weather has lifted. We may be witnessing an acceleration in central bank reserve purchases going on.

British pound –The pound faced no domestic data earlier today and although it’s powered forward versus the euro, it’s still a shade lower against the dollar. However, at $1.6305 it is trading at a one month high. Despite all of the political, growth and fiscal flack that accompanies the British economy, the pound has crept quietly up against the euro to such an extent that on today’s euro weakness it’s trading at its firmest price in exactly four months.

Andrew Wilkinson

Senior Market Analyst

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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