Forex report: Spanish jitters soothed

The euro knocked on the door of $1.2400 this morning making it the strongest reading in three weeks. Firm demand at a Spanish government bond auction helped inspire confidence as did a statement from the Swiss National Bank in which it appeared to breathe a sigh of relief on a lesser threat to the economic recovery.

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Euro – We’ll never know for sure whether the bond vigilantes won the day by driving up Spanish yields ahead of key auctions today. However, we can say for sure that Spain could have sold almost two-and-a-half-times the bonds it did sell today and that this has helped settle a nervous market. The Bank of Spain also said it was thinking about making public the results of recent stress tests performed on the banking system. Of course a factor driving this decision is whether in doing so, would it force the hand of other nations to perform and make public their findings?

The euro reached $1.2396 before paring some of those gains and easing to $1.2365 ahead of U.S. data. It was also buoyed by comments from the SNB who left interest rates alone at 0.25% today. But in a statement the central bank said the strengthening of the franc, which it was forced to fight against to safeguard the interests of domestic manufacturers, was now less of an issue. The dampening effect of a weak euro on exports to the Eurozone was now being offset by rising foreign demand. The SNB said, “In light of these pleasing developments, the deflationary risk in Switzerland has largely disappeared.”

U.S. Dollar – The dollar index is lower, which is surprising in light of a euro rebound. I say this because one would expect a stronger dollar to play out against the yen, but that’s not the case today. A disturbing labor market development was just released indicating a 12,000 rise in U.S. initial claims.

British pound – The pound is higher today as broad risk appetite returns. There are two elements dragging sterling in different directions. A jump in May retail sales data, which improved 0.6% rather than the expected 0.1%, argued that the recovery was perhaps on a firmer footing. However, in the Mansion House speech, Governor Mervyn King said that forward looking indicators across the monetary aggregates argued that demand might falter, which might deflate inflationary pressures. He conflicted with the weekend words of fellow MPC member Andrew Sentance by saying that spare capacity was evident. Mr. Sentance argued that it wasn’t and that a revival for the economy could spell rising inflationary pressure requiring faster remedial monetary action. Investors are left to take their pick on the direction of sterling, which is sitting at $1.4800 while against the euro it remains unchanged at 83.55 pence.

Japanese yen –The yen is curiously firmer against the dollar at ¥91.07 perhaps due to signs of continuing economic recovery courtesy of a coincident index reported in Tokyo today. Stocks were a little wobbly indicating lingering worries over global growth emanating from the Eurozone. The yen is, however, weaker per euro this morning at ¥112.50.

Canadian dollar – The Canadian dollar reached a one-month high against the U.S. dollar ahead of the weekly U.S. initial claims data, which appears to have somewhat dampened risk appetite. In the overnight session the loonie rebounded from weakness to 97.07 U.S. cents but currently stands at 97.45 cents, which is still down by a tenth of a cent on the day.

Aussie dollar – The Aussie is unchanged at 86.55 U.S. cents today. Earlier the commodity sensitive unit fared losses as dealers sold it as crude oil and copper prices dipped. However, it has rebounded from a decline to 85.83 cents.

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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