Forex report: Euro defies weakness

The sun shone brightly over the Pacific this morning leaving investors in no doubt that the region is set to ride the building crest of a wave in the coming quarters. A fresh wave of enthusiasm for the Asian growth rebound helped tip the scales against the low-yielding yen and in favor of other high-yielding units and riskier assets. On the eve of Chinese data likely to show the fastest pace of growth in three years, South Korea had its country rating raised by Moodys Investor Services while at the same time its rate of unemployment dropped by the most in a decade. The government in Singapore raised its 2010 growth forecast to 9%. Certain metals prices reached 19-month highs as investors anticipated stronger demand ahead.

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Japanese yen –With a benchmark rate of 0.1% and accelerating risk appetite in faraway lands, the yen is losing its use in a world where risk appetite is back on the table. It slipped today against all 16 major trading counterparts falling to ¥93.50 against the dollar and ¥127.20 per euro.

Euro – While Greek bond prices are slipping hard on Wednesday, the euro actually managed a significant rally to as high as $1.3665 overnight. Boosting sentiment in the European session was firm data that showed industrial production in the Eurozone during February blew away market expectations of a 0.1% gain and in the event rising 0.9% to give an annual change of 4.1%. That’s positive news at a time when analysts note the difference in the relative pace of growth between the U.S. and Europe.

The euro later eased to $1.3612 but has found immediate support at $1.3600 this morning after a German newspaper Handelsblatt reported that a German-led package of aid to Greece is likely to be €90 billion rather than the announced €30 billion. The EU retorted that this was just speculation, but the threat of domestic unrest from German taxpayers is keeping investors undecided on the success of the package at this point. I think it is, however, worth noting that the German taxpayer might struggle to find many better propositions of a three-year 5% return over three years in this ultra-low rate environment. That is of course assuming a repayment of capital in 2013. And we could be in for a yield drought especially if the aid is not forthcoming and the Greek economy implodes on an even greater pace of contraction.

That’s something that experts at Fitch ratings today said was not likely. It forecasts only a mild and manageable Greek economic contraction. But it did say that Greece would probably lean on the EU and IMF aid packages within the next couple of weeks and would prefer not to be seen as having failed in the capital markets. The interview as reported by Bloomberg news seemed to shock the euro sending it to its intraday low. But still, it must be a comfort to the severely tested Greek PM and cardiac-attack candidate George Papandreou to know that if no one wants to lend his nation 10-year money at 7% he can always save himself 2% by knocking at the door of the EU.

U.S. Dollar – The dollar index is lower for a fourth day although the battle with the euro is keenly fought. With arguably lessening odds of a rout for the euro on the back of the Greek aid package, the dollar is making harder work of continuing its uptrend against the single European unit. Today should be event-packed for the dollar. Before Fed Chairman Bernanke delivers his economic outlook at the Joint Economic Committee to Congress, dealers will have to digest March data on inflation and retail sales.

Aussie dollar – A Westpac consumer confidence index reading slipped a shade but proved the Australian nation remained remarkably resilient against the background of five interest rate increases. The Aussie unit joined the rally in Asian currencies rising to its highest point of the week where it’s currently trading at 93.43 U.S. cents.

Canadian dollar –I have to take back what I said after last week’s jobs report that was skewed towards part-time jobs. Having already burst through parity the day before the report, I noted that the Canadian dollar might now need a greater rational to keep on trucking. Today the loonie has once again taken flight and reached a 22-month high against the U.S. dollar at $1.0039 and is showing no sign of coming down back down to earth just yet.

British pound – The pound has a rather interesting chart pattern having fallen from an opening peak at the start of the week and closing that day at its low. Since then the pound has fought back and the picture looks to be one of strength. A smidge higher than its current $1.5441 invites a revisit to Monday’s peak at $1.5485, which is attainable in the event that the dollar takes a leg down on today’s data due out any moment.

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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