Forex report: Euro impending sense of doom

IB FX Brief: Fitch downgrades Portugal: Eurozone mess deepens

There appears to be an accelerated and impending sense of doom about the status of the euro on Wednesday. Fears over its survivability are once again ebbing to the fore and have caused a pickup in selling as speculators test its lowest level in 10-months versus the dollar, while the Australians have never had a less expensive time to visit Paris or Frankfurt. The dollar is once again steamrolling through the currency pack to emerge as the ultimate safe haven as investors slowly cast off every other alternative.

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Euro – It’s hard to note that the intraday low point for the euro is $1.3343 because the single currency is sitting on the edge of a precipice that one senses might have a precipitous drop before the day is over. Politicians in Germany and France are now saying that a financial rescue plan for Greece will most likely need the assistance of the IMF. Meanwhile Britain’s Fitch Ratings agency downgraded the long-term debt rating of Portugal this morning resounding like the crash of a cymbal in the library.

The euro slumped lower crashing through support in early Asian trading against the dollar and dropping to a low against the yen at ¥121.42 before recovering to ¥122.00. Meanwhile the Aussie gained against the euro to its highest point ever versus the single European currency where one euro only buys A$1.4610. Over the course of a year the euro has now lost 30% against the Aussie unit.

There is an added sense of drama this morning too as the EU summit commences. One analyst believes that Greece will at some point announce a temporary exit from the common currency, while another notes that a default by the Greek government is on the cards “at some point.” Meanwhile the stance by German premier Angela Merkel seems to be towing the line that will gain maximum domestic acceptance. She’s now arguing vehemently that financial aid for Greece is an absolute last-ditch reality and that Germany should not buckle under the strain as Greece finds other means to resolve the sticky situation it’s in. The ongoing crisis does give the appearance of being at a watershed as speculators usher in fresh resources against the euro.

The crescendo in the crisis leaves improving domestic data resting firmly on the periphery today. Composite PMI data for March rose from 53.7 last month to 55.5 with both services and manufacturing sectors showing signs of an accelerating expansion. With Germany there were also signs of increasing confidence in the recovery as exhibited by lively IFO data showing an index of business expectations rose by one point to 101.9.

U.S. Dollar – The greenback is higher by almost 1% in this chaotic environment rising most against the euro and Japanese yen. The dollar is also winning hands down against the other traditional safe haven unit of the Swiss franc, which its domestic central bank is having a hard time keeping penned in thanks to Eurozone upheavals. The move comes hours ahead of durable goods data, which should show a third-straight gain in the output of goods supposed to last more than two years. Later this morning we should also see data showing a rebound in sales of new homes.

British pound – The pound is lower against the dollar at $1.4959 ahead of this afternoon’s pre-election budget in the U.K. Hopes are that the Chancellor will use a lower-than-expected deficit to announce a lower need for debt issuance as the economic recovery slowly gains traction. At 89.31 pence, the euro has also ceded ground to the pound this morning. Investors are starting to recognize that the pre-election fear premium built into the pound is perhaps sufficient especially against a fractured euro.

Canadian dollar –All eyes will be on a speech due to be released shortly before 1pm eastern time written by Bank of Canada Governor Mark Carney. Speculation surrounds the content of a paper, which may give the central banker latitude to prepare business and the public for higher domestic interest rates during the remainder of 2010. All ears will be listening to the later 2:10pm press conference.

Mr. Carney has a long-standing commitment to the 0.25% benchmark rate of interest using the caveat that he can stand by this so long as the inflation outlook doesn’t change. However, the recent burst of growth felt by the Canadian economy has shifted the bank of Canada’s preferred measure of inflation, lifting it through the 2% target. Exporters have been shielded from a rising currency in part by the absolute strength of the rebound for the economy.

Despite the plausible expectation of a conditioning for investors the local dollar is giving way to the risk aversion rally in the U.S. dollar today. It’s not as though investors haven’t already discounted the likelihood of rising Canadian rates, which has propelled the unit towards parity. Today the loonie buys 97.72 U.S. cents after earlier rising to 98.42 cents.

Japanese yen – Mr. Yen returned today. He’s possibly the most influential voice in living history on the value of the dollar-yen pair. In an interview with reporters in Hong Kong today the Japanese former Ministry of Finance advisor told reporters that the government should not intervene in the currency market to prevent a probably increase in the value of the yen from ¥90 to ¥85. Mr. Eisuke Sakakibara feels that the Japanese economy has an edge over that of the U.S., which will provoke more buyers of yen in exchange for dollars. The market seems to have a little problem with that line of logic a week after the Bank of Japan buckled under the weight of political pressure to double the size of its stimulus program to the banking system. The dollar has just surged to a one month high at ¥91.80 despite the words of wisdom from Mr. Yen.

Aussie dollar –With the market in no mood for risk this morning the Aussie dollar is in retreat – at least against a surging U.S. dollar, where the Aussie today buys 91.17 U.S. cents. Still, the Aussie dollar found solace in a government report that showed a pick up on skilled vacancies during March, indicating a still expanding labor market. The Aussie also rose against the yen to buy ¥83.60.

Andrew Wilkinson

Senior Market Analyst

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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