Forex report: Euro continues to face hurdles

IB FX Brief: Endless series of hurdles tiring the euro

A creeping sense of discomfort towards the ECB has grown during the sovereign debt crisis. Its President, Jean-Claude Trichet has to carefully navigate whatever white waters come rushing at him. With now vocal opposition from the Bundesbank’s Axel Weber countering the latest bond purchase program, growing signs of discontent are creating further waves among investors. The ECB could recall and gilt-edge its coins in circulation, but at this stage of the game it’s hard to claim that even with added intrinsic value, investors would find the euro any more appealing. The drift lower for the single currency continues towards last week’s low as investors weigh up the price of saving the Eurozone from a debt crisis and the implications of fiscal austerity on future growth.

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British pound –The Bank of England’s inflation report dented the British pound thanks to a likely undershoot for inflation within two years. That means that despite a pick-up the projected pace of growth, the Bank will not be making substantial changes to interest rates. It’s hard to splice this impact on the pound and that from recent political resolution in which Cameron and Clegg have formed a workable government offering sizeable near-term spending cuts. Governor Mervyn King today endorsed the recent offering.

It’s a little ironic that in light of improving growth prospects the pound is tracking the euro over fears of a growth reduction. But the pound is inevitably hitched to the riskier currency bandwagon. It remained stable per euro at 85.28 pence but declined against the dollar to stand at $1.4771. A wider trader deficit showed a rise in the volume of exports during the month of March.

Euro – The euro fell to $1.2562 on Thursday as sentiment remained weak towards the single currency. Much worse projections lurk in the background with bearish protestors eager to remind us that 11 years ago the euro launched at a rate of somewhere around $1.18. More important in the here and now is the fact that at present the euro has held up off a floor created in last week’s mania at $1.2521. The retest of that low is a logical extension of investor sentiment curious to know whether the euro can hold up to the test in the face of fresh and positive fundamental news. The prospects, however, do look daunting for the euro especially with the daily grind lower from $1.31 on Monday.

U.S. Dollar – The immediate reaction to the European package on Monday was to send the dollar lower by 1.4%. A fall to $1.31 per euro was the clear heavyweight here. However, since that time not only has the dollar index recovered its losses but it also stands 0.6% higher than last Friday’s close. It is equally harsh to say that the dollar has been in demand across the board this week. It seems to be disdain of the euro as an alternative that’s driving the flow. The commodity units have fought back substantially from earlier weakness. Today the latest arbiter of domestic health will be revealed in the initial claims data later this morning.

Aussie dollar – The Aussie has been unable to sustain a move back above 90 U.S. cents this morning despite a jump in domestic hiring. The unit stands at 89.84 cents and compares to a peak at 90.26 cents after the government reported a 33,000 increase in jobs during April. Coupled with an upward revision to March data, the economy produced 60,000 jobs compared to earlier expectations of 42,000 for the latest two months.

The problem facing the Aussie is the backdrop to the global environment. Too fast a pace of growth in China is causing the Aussie a problem for investor fears that the Chinese authorities will have no alternative than to cool its economy. Meanwhile as a growth-currency the Aussie continues to be on the defensive as long as Eurozone growth risks mount. The Aussie did continue higher against the yen to ¥83.25.

Canadian dollar – And while the same growth-sensitivity criticism can be leveled at the Canadian dollar, the nation doesn’t claim China as its biggest trading counterparty. Although the Bank of Canada is highly likely to embark on a period of monetary tightening starting next month, the extent of interest rate increases is uncertain. But the point is rate adjustments are likely, while in Australia they might now be passé. The logical conclusion is that the Canadian dollar represents a more efficient bet on upside growth risks, which is why it continues its rebound against its largest trading partner of the U.S. Today the Canadian dollar rose to a high of 98.91 U.S. cents but has since pared some of the day’s gains and stands at 98.48 cents.

Japanese yen – The yen continues to foster confusion as global risk attitudes wax and wane. Investors earlier bought the dollar and sold yen driving the dollar above Monday’s peak to ¥93.64. That coincided with weakness in stock market futures although admittedly accompanied a 2.2% gain for Japanese stocks. However, the move is rapidly reversing course and the yen has strengthened to ¥92.61 despite an improvement in U.S. stock index futures. A shade more strength for the yen will see the entire midweek trading range eclipsed by Thursday’s volatile movement.

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.

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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