Forex report: Eurozone contagion looms

So much for spinning on a dime as far as a euro currency rebound goes. The rally in the fortunes of the single currency proved to be nothing more than a passing ship in the night. The Herculean efforts to reduce its fiscal deficit, or at least those put down on paper by the Greek government, have served to put the less austere measures from governments in Spain and Portugal on center stage. And thus the tragedy drags on, weighing on the health of European economic recovery and in its wake has dragged the euro down to its weakest level against the dollar since June 2009 – a seven month low.

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Euro – The ECB voted to keep its interest rates unchanged to no one’s surprise this afternoon. The press conference follows in due course although it’s unlikely that ECB President Jean Claude Trichet will want to use this opportunity to further address fiscal follies amongst peripheral nations. The euro slipped earlier against the dollar to $1.3827 before rising to its current $1.3848 leaving it down half a cent on the day. Against the Japanese yen the euro lost 0.72 yen to stand at ¥125.72.

British pound – The Bank of England indeed voted against extending the value of corporate and government bonds at Thursday’s monetary policy meeting announcing in its statement that it would instead leave the door open in the event that a weakening credit situation demanded further purchases going forward. In a sense today’s decision removes the drip from the patient’s arm and nurse can always reinsert the needle if Britannia fails to recover under her own steam. The pound was lower in line with the euro against the dollar, falling to $1.5806 at its morning low before adding a half cent to reduce the day’s losses to about a half cent at $1.5858.

Aussie dollar – Weakness in domestic retail sales harmed the Aussie dollar Thursday. Investors anticipating that December sales would rise by 0.2% over the prior month were disappointed to learn that in the event sales declined by 0.7%. This could be seen as evidence that the three earlier interest rate rises from the Reserve Bank of Australia had a considerable impact. The Bank makes its quarterly monetary and economic review available later this week although it’s already stated that it has very little early evidence to go on to evidence the impact of its policy changes. The Aussie reached a six-week low against the dollar at 87.75 U.S. cents although has since recovered to 88.04 cents. The unit was also hampered by a shock spike in the unemployment rate in neighboring New Zealand, which dampened demand for its dollar and weighed on regional sentiment. Copper and gold prices are also lower in light of preparations for the new Chinese lunar year with some evidence of position lightening from Chinese investors.

U.S. dollar – Weekly initial claims data deepened weaker sentiment towards equities before U.S. markets opened. Hopes for a positive reading for January payrolls due out on Friday were dashed as an expected 455,000 initial unemployment claims proved overly optimistic in the face of a true reading of 480,000. While the number remains below half a million, investors can hold on to their angst for a while longer as the job losses continue to taper with Spartan evidence that employers are ready to turn on the hiring spigots.

Japanese yen –Although the Japanese yen has gained ground against the major units overnight, it’s still not benefitting from the same type of safe haven bid that typically accompanies weakness in global equity markets. Against the U.S. dollar, the traffic seems to be largely one way at present and yen bulls are likely to remain disappointed to learn that it’s the dollar that is winning this battle. That said, today the yen rose marginally to stand at ¥90.75, but you have to remember that this is now in light of a dollar rally to ¥91.28 yesterday.

Canadian dollar – Following an earlier overnight decline the Canadian dollar has regained its poise against the U.S. dollar and is now unchanged at 94.19 U.S. cents. The robust nature of the loonie’s performance is possibly best accounted for by the fact that it’s rooted in a resource-rich nation, benefitting from an ability to deal faster with domestic problems due to a smaller population, while benefitting from recovery in the United States. Both Chinese and Russian central banks have recently stated that they have stepped up the pace of purchases to hold in reserves as an alternative to the U.S. dollar.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com

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.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument

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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