Forex report: Euro rebound subsides

IB FX Brief: Euro eases at the end of a strong week

It’s probably insufficient to state that Eurozone sovereign debt issues are stepping into the background. Most people seem to be still of the opinion that rallies in the euro are for selling, although I for one still need to be convinced that investors are following through on that promise. But it is possibly safe to say that investors’ fears have been soothed this week by the Spanish central bank achieving what the national soccer team failed to do, as it won a decisive market victory in clinically executing a bond auction. It has also agreed to publish stress test results in July for domestic banks in an effort to further soothe fears. But the one think likely to round-off residual fears is a further rise in the euro itself. This week the euro has gained 2.3% against the greenback in its strongest performance in 13 months. No longer does it seem that the world is falling apart on account of events stemming from Athens.

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Euro – The euro is taking a breather from a near three-week peak against the dollar. Inspired by Thursday’s successful Spanish bond auction the euro reached $1.2417 and this morning has edged back to $1.2381. A New York Conference Board index of leading indicators for China released this week jumped to its best level in 14 months undermining theories that the fallout from European debt woes will send the globe toppling into a second dip. While the Chinese authorities attempt to further cool still red-hot property markets, they also face a conundrum of how hard to push back at a time when export orders might recede.

U.S. Dollar – The dollar index is only marginally lower today with the Japanese yen and Swiss francs being the biggest drivers. Weaker economic data in the U.S. this week has somewhat taken the shine off the dollar sending a reminder that the Fed is unlikely to provide a yield boost to the world’s major reserve currency anytime soon. In a WSJ editorial this morning former Fed Chairman Greenspan warns that the writing is on the wall for the world’s bond markets and especially that of the United States where near term influences have allowed the yields to fall out of proportion with the reality of the nation’s funding needs.

British pound – Mortgage lending data showed 51,000 home loans were approved throughout May and up from 48,000 during April. The Bank of England warned, however, that tight lending conditions continued to hamper demand from first time buyers and that lenders don’t expect much more than a flat market over the next several months. The pound was bolstered by better fiscal news today. The May public sector net borrowing requirement was £16 billion compared to £17.4 billion a year ago while April data was also revised down from £10 to £8 billion. That means that the fiscal mess is 13% less during the last two months than was expected and the encouraging news is that the smaller deficit comes on account of higher tax receipts thanks to economic growth. Dealers pushed the pound as high as £1.4886 before it gave ground back to stand at £1.4800.

Japanese yen –The yen continues its upwards path against the greenback and stands at ¥90.63 to close out the week. Minutes from the May meeting reveal that Bank members saw limited signs of fallout for the Japanese financial system stemming from the Eurozone crisis but that conditions must be monitored. Today Prime Minister Kan suggested he’d entertain an opposition proposal to lift the consumption tax, which potentially broadens the reliance of income sources for the government and might help Mr. Kan’s desire to reduce the fiscal deficit – the world’s largest. For now his saber-rattling on the deficit is being taken as a yen positive.

Canadian dollar – The Canadian dollar is little changed at 97.13 U.S. cents as investors wonder whether to buy or sell commodities. Crude’s price has remained relatively buoyant and has added at least $10 per barrel in the past two weeks as global growth fears have subsided. Meanwhile the price of gold has come very close to its record high now that the dollar has started to lose its appeal.

Aussie dollar – The Aussie reached 87.12 U.S. cents overnight and remains higher but has lost some of its shine at 86.81 cents. The Aussie really needs to see more evidence of stable global demand before it can push further forward. Within the Conference Board’s leading index data report for China there was little sign that momentum would accelerate from its present pace.

Andrew Wilkinson

Senior Market Analyst

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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