Forex report: Investors warm to euro

Following a tense close to last week during which the euro slumped below $1.20, the silver lining of such weakness shone through in data this morning. German factory orders jumped for a second month catching analysts by surprise as domestic output retained its appeal to overseas buyers. Although the European area sovereign debt crisis is supposedly restraining domestic activity, the appeal of lower cost goods produced within the Eurozone is boosting overseas demand and attracting overseas investment. The euro rebounded by a whole cent from an earlier decline to $1.1877.

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Euro – German factory orders did precisely the opposite of economists’ expectations and rose by 2.8% during April following an initial shock jump of 5.1% in March. That leaves demand 29.6% stronger than a year ago. Adding to the curiosity is the fact that both domestic and export orders grew at approximately the same pace. At the same time the data provokes the question over precisely how devastating measures aimed at fiscal stringency will prove. Investors current perception is that European growth will now be a drag on global growth and even cause a further leg of economic weakness. What today’s data wakes investors up to is the fact that Germany’s export capability helps retain its status as an economic powerhouse. It also raises a question mark over the bearish perception investors have baked in to the cake about how much fiscal consolidation the core nation will face in the years ahead. Trading in a weak euro for export buoyancy assuming it can be sustained might not be a bad deal after all.

The euro rose to $1.1981 against the dollar while also rebounding sharply from another multi-year low against the yen at ¥108.00 to stand at ¥110.01. The euro did, however, decline against the British pound to 82.62 pence.

Canadian dollar – The Canadian dollar is also weaker this morning as equity and crude oil futures struggle with the concept of a rally in early trading. The healthy state of the Canadian economy was evidenced nicely ahead of the U.S. employment report on Friday detailing an additional 24,000 jobs. However, that news was eclipsed by the news bleeding out of Hungary and once again damaging global investor confidence. The Canadian currently buys 94.20 U.S.

Japanese yen –The yen felt the wind in its sails from a risk in global risk aversion on Friday and rose to ¥91.00 per dollar. However, a slightly less pessimistic tone has see the yen ease this morning to as low as ¥92.00 per dollar.

U.S. Dollar – The latest bout of dollar strength came about on Friday as a new Hungarian government cried out to the world that, “Hey, we look like Greece too!” Investors were taken aback by the claim that the nation could default on its debt and accordingly punished its currency and roiled its debt market. A weekend of damage control initiatives by the government now aims to assure investors that Hungary will abide by a previously agreed to plan with creditors to reduce its fiscal deficit. Having already received an IMF loan a couple of years ago, the nation is less indebted than some of the European peripherals. At least one ratings agency confirms that the pre-existing plans and the fact that the nation’s outstanding obligations are heading in the right direction means a default is unlikely to be on the cards. Meanwhile the dollar index continues its ascent and stands at 88.35 to start the week.

British pound – At least part of the noise coming out of the new Hungarian government was highly likely politicking with the incumbents trying to highlight the nature of the problem under the former government. We’ve seen a similar tactic in Britain since Prime Minster David Cameron took office. We’ve heard a couple of claims that Gordon Brown’s Labour government made some unbelievably bad political choices during its dying days and again today the Prime Minster was at it again by pointing out the legacy of what he called a “staggering” £50 billion a year interest burden five years from now. The pound rallied during the earlier in the session reprieve for the euro and reached an intraday high at $1.4517 before reversing to $1.4473.

Aussie dollar – The commodity dollar attempted a similar rebound, which continues to look hard to sustain for now at least in light of the failure of the euro to maintain its earlier gains. During the day session a report showed a 4.3% increase in internet and newspaper job postings throughout May and confirmed the ongoing healthy nature of the domestic Australian recovery. However, adding volatility to equity, bond and currency markets is not exactly the recipe that the Aussie needs to strengthen. The Aussie is currently down a half cent at 81.75 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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