Forex report: Fear gauge rises in Spain

I tend to agree with Jim Rogers that the single European currency is overly depressed and I can’t argue with the merits of the long position he claims to have made recently. I don’t necessarily agree with his logic that it will take between 10-15 years to decimate the euro. That type of event could happen much faster, although I personally see the euro weathering the storm. Talking of which, another little squall blew up today this time off the coast of Spain, which is currently having the effect of sticking a thumb in Jim’s eye as the euro recoils from a two-week high against the dollar and the yen surges on enflamed worries over European sovereign debt.

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Euro –A higher tolerance for risk has emerged during the past several sessions thanks to a growing body of evidence showing little impact on growth of government debt worries. Investors in the United States milked this change of heart yesterday for all it was worth and drove the S&P 500 index back above its 200-day moving average providing further encouragement for risk tolerance. But a punctuation mark appeared today after Spain and the EU denied a report published by “El Economista” stating that in combination with the U.S. and the IMF, a €250 billion line of credit was in the process of being drawn up to relieve Spain.

The euro quickly fell from its highest price so far in June from $1.2352 to $1.2254 during the morning as government bond spreads continued to depict worrisome prospects on the horizon. At a stroke risk appetite came undone. Whether it will last or not (I think not), we’ll have to see. The euro has recovered to $1.2283 but also remains lower against the Japanese unit at ¥112.00.

U.S. Dollar – The weaker risk environment is helping to drag the dollar index higher this morning and it currently stands at 86.24. We’ll have to be patient in seeing how much of yesterday’s surge in stocks is returned, but we do have fresh data to digest. Although low interest rates were likely behind a 17% jump in mortgage applications last week, other data surrounding the housing market was less encouraging. Not only were May housing starts 10% weaker than during April, but the earlier data series was revised down indicating construction weakness. And while the data is surprising it is not a totally unexpected. The housing market has stabilized but courtesy of bloated inventory levels we shouldn’t expect construction recovery to simply pick up where it left off pre-recession. Future activity also appears to look a little wobbly as signaled by a 5.9% decline in building permits.

British pound – The better risk tone had also helped a sharp recovery in the British pound, which saw it reach $1.4837 yesterday. Today it recoiled to $1.4751 before rebounding to $1.4791. There was better labor market news to buoy the unit today and on a two-month basis employers added 63,000 jobs compared to earlier predictions of 47,000 new positions. A drop in the claimant count to 4.6% during May was accompanied by positively revised data for April that also saw the ILO unemployment rate drop to 7.9%. The latter measure is a better internationally recognized standard comparison.

Japanese yen –The spike in risk aversion today helped provide a similar boost for the Japanese yen, which surged to ¥91.09 versus the dollar. Currently the dollar buys ¥91.29 while the yen remains in positive territory against most major currencies.

Canadian dollar – The Canadian dollar is left sitting in the same basket carrying the “Risk” label today as the euro. The waves of fear continue to wash up overseas each time European fears emerge. Only over time is it becoming apparent that growth is sweeping aside those fears and as that happens, the riskier commodity currencies are entitled to take two steps forward. Today the loonie buys 97.07 U.S. cents having reached 97.55 cents on Tuesday. The Canadian dollar is off its Wednesday low at 96.80 cents.

Aussie dollar – The Aussie was meandering nicely during the positive Asian session before the “El Economista” story emerged knocking the dollar off its perch. The story cost investors around 0.75 cents as the Aussie fell to 85.81 in European trading. But its recovery is decent and the Aussie is back to 86.12 after an insightful Bloomberg news interview with a Deputy Governor at Russia’s central bank. He notes that as the world’s third largest holder of international reserves, his nation continues to back away from holding U.S. dollars. Over the last four years Bank Rossii has reduced its proportion of dollars from half of all reserves to 47%. Having agreed to include Canadian dollars last November the official noted the likely addition of Australian dollars to the portfolio going forward. Typically Russia’s reserves are comprised of dollars, euros, yen and pounds.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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