Forex report: Risk aversion slams commodity dollars

The euro remains weak but certainly off its earlier four-year low as investors try to piece together recent official comments only to conclude that the road map looks messy. European governments appear divided in their efforts to harness the financial volatility arising from the sovereign debt crisis. Periodic rallies seem to be confined to those times when consistent bad news weighing on the euro has been sufficiently digested leaving downside momentum shot. The weighty number of shorts trying to get out quickly encourages other nervous shorts to do the same thus accentuating the apparent recovery. Yet nothing appears to have changed the perception that a crisis of confidence is still in place.

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Euro – Chancellor Merkel today warned investors that she’s ready to defend the euro. Earlier Jean-Claude Juncker who heads up the EU finance ministers sounded ambivalent when he said that yesterday’s market rumor was not an urgent topic.

Midweek Germany unilaterally imposed restrictions on short sales of government debt along with bank and insurance companies’ shares. Today ECB member Gonzalez-Paramo told Italian journal Il Sore that anti-crisis measures need to be enacted at the EU-wide level in order to be effective.

The subsequent ease in the 16-nation euro currency has brought is back to $1.2337 on Thursday, with the half cent loss overnight likely attributable to investors’ concerns that the EU strategy remains all over the road map.

Japanese yen –The Japanese yen once again rose as financial market volatility gained. An undershoot for first quarter GDP played into the hands of yen bulls. A less vigorous pace of growth proves to be a negative factor for the outlook for global growth. The yen was already on the gain anyway with regional Asian stock markets continuing to look seasick. The yen rallied against the dollar with the rate declining to ¥90.80 with the dollar trading at a two-week low against the yen today as pre-market index selling accelerates. The Aussie also maintained its sixth day of losses against the yen making it the worst run in 16 months. The finding by an international panel that it was a North Korean manufacturer torpedo that recently sank a South Korean ship also heightened geopolitical risks leaving the Japanese unit the natural gainer in the region. Against the euro the yen rose to ¥112.00 and against the British pound it gained to ¥129.75.

Aussie dollar – As well as caving in against the yen, the Aussie dollar continued its losses against the dollar declining to 82.62 U.S. cents today. The string of bad luck for commodity prices is taking a toll on the unit along with fears for the pace of growth in China.

British pound – Despite news that retail sales continued to a three month recovery during April the pound was more affected by its current status as a risk currency. The pound remains a hostage to the euro and performs sheepishly as though it has a gun pointed squarely at its temple. Today it shed another cent-and-a-half against the dollar and buys a mere $1.4257. Yet despite its flaws the euro maintains an upper hand and edged higher against the pound to 86.44 pence.

U.S. Dollar – Initial jobless and continuing jobless claims diverged in Thursday’s session and for once the market is responding negatively through buying the dollar, presumably as it portends risks to global growth. Admittedly the rise in initial claims to 471,000 remains a far-cry from the required break-even pace of 400,000 that would be needed to help drive additional employment growth in the economy. The dollar index has rallied 0.5 percent so far despite a near one percent gain for the yen per dollar.

Canadian dollar – The American dollar’s surge is pile-driving into the Canadian dollar, which is weakening pretty close to the losses incurred on “flash-crash” Thursday. The loonie is 1.8 percent down at 93.77 U.S. cents in the aftermath of today’s employment signal.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers

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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