Forex report: Eggs and baskets

The single euro currency appears to be a little more stable ahead of an ECB press conference at around lunchtime in Europe. The euro buys $1.2046 this morning with traders wary of taking a fresh long position ahead of the grilling from the press for President Trichet. Investors want to know whether the central bank will continue to buy government bonds openly in the market place pursuing a policy that has largely failed to drive yields down sustainably. Much of today’s stability for the euro is due to a euro-friendly comment from a Chinese official who warned against chasing a dollar that faces its own problems ahead.

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Euro – Earlier in the European morning an auction by the Spanish government successfully shifted a chunk of three-year bonds to investors. The relief helped drive down spreads of peripheral nations’ bonds versus core German bunds. Earlier the head of China’s $114 billion pension fund said that the euro would stabilize gradually. Moreover he noted that the dollar faced its own problems with the fiscal deficit remaining a key concern.

The comments warning investors not to put all of their eggs in one basket appear to have helped soothe some concerns that central bankers around the world might ditch the euro over fears it would shatter. Today’s comment from the National Social Security Fund chief is not the first confirmation that China is not about to turn its back on the Eurozone. The euro has ranged so far today between $1.2008 and $1.2088 and remains just short of ¥110.00 against the Japanese unit.

U.S. Dollar – The observation from Fed Chairman Bernanke in yesterday’s testimony to Congress that thus far the United States had felt only a limited impact from the Eurozone crisis is also a euro positive factor today. In addition China released official confirmation of a 48.5% jump in exports during May, which indicate a healthy overseas demand for its manufactured goods. The dollar index has dipped below 87.50 and appears to be growing vulnerable to a trip back to last week’s range as broader risk aversion eases.

British pound – The pound rose to its highest price against the U.S. dollar since last Friday after the Bank of England announced no changes to either its short-term interest rate or its bond purchase plan, which was exhausted in April. Sterling rose to an intraday peak at $1.4643 although has eased to $1.4600 since. Against the single currency the pound is marginally weaker at 82.42 pence.

Aussie dollar – Not only did China’s export data help revive confidence in the global recovery, but a stellar employment report in Australia also buoyed the local dollar this morning. Having been trampled underfoot since the U.S. employment report, the Aussie has shed four pennies against the dollar to as low as 80.75 U.S. cents. However, after a May report showing an unexpectedly large increase of 26,900 net new positions, the Aussie has recovered all but a cent of that loss today. The rate of unemployment slipped to 5.2% from 5.4% as 36,000 full-time positions were added to the labor market.

Canadian dollar – The firmer tone to risk appetite is also boosting the Canadian dollar, which is also supported by investors moving back into the crude oil market. Its price has added $6.00 per barrel this week to trade above $75.00 once again as confident investors predict that it is mispriced if global demand is not faltering on account of Eurozone woes.

Japanese yen –The odd currency out this morning is the yen, which remains relatively firm against the dollar at ¥91.19 despite the returning appeal of risk. Against the British pound the yen is cheaper at ¥133.14 while it is also losing ground to the euro. The stellar Aussie jobs report has propelled the Aussie unit higher and today it buys ¥76.70.

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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