Forex report: Risk appetite returns

French President Sarkozy’s strong weekend words supportive of the plight of Greece have seemingly struck a chord with investors across a variety of asset classes today. It would appear that last week’s efforts by the authorities in Greece have received a positive global response leaving traders ready to once again step back up to the table to feast on bolder prospects as appetite for risk returns.

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Euro – Monsieur Sarkozy’s comments gave investors the strong impression that EU partner aid in the form of financial assistance was very much available now that a stringent budget has been implemented. That the collective EU governments have given such a strong seal of approval for the Greek measures bolsters Sarkozy’s stance that the bloc is ready, willing and able to come to the financial rescue of Greece. The determined aspect of those words is in the short term at least having as supportive impact on the euro and risk in general.

The potential for independent sovereign default on behalf of the government of Greece appears that much more remote beyond a budget that has allowed for the creation of demand for high-yielding government debt. And the ongoing ratification of the path its government is treading helps make the short posturing surrounding the euro that much more tenuous. Latest CFTC data through March 2 shows that short euro positioning by speculators took a 7% haircut. Outstanding short positions slipped to 66,770 as the euro steadied.

There is little on the data front today other than a small decline in French business sentiment, which slipped from an index reading of 104 to 102 for March. In neighboring Germany the data could have been worse for industrial production during January. A 0.6% gain fell short of an expected 1% gain, but a serious backward revision for the better left the year-over-year data with a 2.2% gain.

U.S. Dollar – A broad rise in risk appetite for Asian stocks inspired by Sarkozy’s comments has helped push the euro to $1.3662 this morning, while the dollar and yen are suffering as investors appear to be breathing that little bit easier.

Emerging market stocks have built on last week’s 4.2% rally and are fast approaching breakeven for the year. The fact that Greek debt woes are receding has helped investors buy into the Asian recovery story more to start the week. In addition, bankers close to counterparties in the Dubai World saga have hinted that the conglomerate with outstanding debt of $26 billion is preparing to submit plans to creditors that may see them receive all of their loans back. According to media reports, creditors’ best option may be patience and a willingness to remain longer term lenders might assure them a guarantee from the government of Dubai.

The “safer” world this week is setting off a domino-style resumption of risk taking. The yen and the dollar are both falling as appetite for riskier bets in the shape of natural resources, emerging stock markets and riskier currencies picks up.

Japanese yen – The yen fell against the euro but is stable at ¥90.30 against the dollar. The better tone to the euro saw it rise to ¥123.32. March is the end of the Japanese fiscal year and is typically marked by a flood of overseas earnings returning to head office. Typically this supports the Japanese unit. However, investors are having a hard time making the argument that such demand for the yen can last beyond month end given the growing differences in the shapes of recovery between the world’s two largest economies. It’s becoming easier to argue that the Fed will shift policy higher before the Bank of Japan despite warnings from former and current Fed officials that now is not the time to remove either fiscal or monetary stimulus. Last week Japan’s Nikkei newspaper ran with a story that the Bank of Japan is set to mull new initiatives to stimulate its moribund economy. This will likely see a reversion to further Bank purchases of government debt in an effort to revive corporate and retail demand for loans.

British pound – Weekend opinion polls saw a widening of the lead for the opposition Conservative party ahead of a summer election. This, along with a wider appetite for riskier currencies aided sterling, which rose to $1.5196 and its highest point versus the dollar since the end of February. The euro rose a little to buy 90.23 pence.

Aussie dollar – This week brings the February employment report for the Australian economy. The booming domestic jobs market is expected to add a further 15,000 positions after an increase of 57,000 in January. Demand for the Aussie was once again fuelled by demand for natural resources in the shape of equities in associated companies or in physical buying of commodities. The Aussie rose to a six-week peak at 91.31 U.S. cents.

Canadian dollar – Throughout the recent Eurozone crisis the Canadian dollar fared far better than its Australian counterpart. As firmer economic data continues to emerge, investors are growing increasingly skeptical that the central bank will be able to maintain its near-zero policy beyond the date it promised in June. Each swoon in the euro that was exaggerated by losses in emerging stocks and commodity prices was felt less and less so by the Canadian unit, which has quietly accelerated towards parity with the U.S. dollar. Today the Canadian dollar buys 97.38 U.S. cents.

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.

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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