Forex report: ZEW sentiment fails to damage euro

The path of least resistance as far as the euro is concerned continued to be higher against the dollar on Tuesday as it reached $1.2275 despite a slump in German economic sentiment. The slide in the ZEW survey during May immediately knocked the single currency only for investors to figure out once again that the escalated fears of financial market participants are a far cry from the reality of rising manufacturing output. In interpreting the data, an analyst noted that the sharp downturn in its reading was solely attributable to the crystallization of the fear that Spain was facing ruinous factors and was being frozen out of the capital markets.

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Euro –Auctions of debt issued today by Spain, Ireland and Belgium met with solid investor demand after bond prices fell on Monday. Late in the session Moody’s slashed the debt rating of Greek bonds to junk status joining S&P in its recent downgrade. In a sense the downgrade was therefore diluted, although it was sufficient to derail a strong bid in the U.S. equity markets. However, European markets have subsequently reversed course as investors have moved on from the news.

The ZEW Institute index for June came in at 28.7 after 45.8 during May severely undershooting a forecast reading of 42.0. The euro stands higher against the Japanese yen at ¥111.92 following today’s data.

U.S. Dollar – The dollar index continues to feel stress at the edge as investors trade in the greenback for riskier propositions. The index stands at 86.43.

British pound – An under shoot for consumer prices last month has stolen some of the gloss from the British pound today. The May CPI reading of 3.4% was one-tenth short of expectations and detracts from yesterday’s sensitivity surrounding MPC member Andrew Sentance’s warning that policymakers would have a tough time deciding on whether to withdraw policy stimulus during the second half of 2010.

With an official 2% central target for inflation the data is still an awful long way from home, although the bank has been swift to blame escalating energy prices for earlier rises. Today’s decline is merely a baby-step, although it is in the right direction. With such a marginal decline in the price basket it is curious to see the pound lose so many friends as it falls to $1.4729 after yesterday’s $1.4810 peak.

Japanese yen –The yen rose versus the dollar after a Bank of Japan initiative to encourage banks to lend to businesses. Governor Shirakawa noted that an export-led recovery was starting to feed through to domestic spending habits. The dollar buys ¥91.14 today after closing at ¥91.49 on Monday.

Canadian dollar – The recovery in commodity prices continues to aid the upwards trajectory of Canada’s dollar, which is today higher at 97.03 U.S. cents. The better fiscal stance along with a more flexible economy is likely to see Canadian output recover to pre-recession levels before any other G7 nation later this year. Since the bank of Canada has only just commenced a monetary tightening policy the local dollar has an edge over the Aussie unit where policy appears to have paused for now at least.

Aussie dollar – Minutes from the recent Reserve Bank policy meeting revealed no strong inclination to lift Australian interest rates for at least another month. Separate comments from its Deputy Governor Ric Battellino also elevated risk aversion at the margin by referring to the European debt problem as “really quite worrying” and suggesting that their problems might not be solved anytime soon. The Australian dollar eased against both dollar and yen. It fell to an intraday low at 85.06 U.S. cents before recovering to 85.76 cents while it also slumped to ¥77.52 before stabilizing at ¥78.25.

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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