It’s hard to define any particular direction resulting from the G20 statement following a weekend of discussions held by leaders of the world’s wealthiest nations. The dollar is higher although marginally so, while the riskier commodity currencies are rebounding from kneejerk losses. The euro, however, appears to be bearing the strain at this early stage of the week in response to a compromise in the G20 message with investors having to determine which flag they want to ride behind. The communiqué stated that each nation should stick to existing stimulus measures put in place as a result of the financial crisis but that each government must act at its own pace to safeguard economic recovery. The consensus view is that the United States will emerge harder on account of willingness to stick by its habitual stimulus plans. Europe on the other hand faces slower recovery chances as it chooses to straighten out a fiscal mess that if left unchecked would result in the market doing its dirty laundry for it.
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Euro – The euro is a little weaker at $1.2336 this morning as investors are swift to side with a long dollar position on account of the apparent likelihood that fiscal stimulus will stroke the growth nerve-endings and help lengthen the recovery process. However, as German Chancellor Angela Merkel pointed out, thus far the stimulus measures have done little to alleviate the rate of U.S. unemployment. And without addressing Europe’s fiscal shortcomings, the spiral would continue to drag the Eurozone lower. The euro weakened against the Japanese yen to ¥110.28 and also against the British pound to 81.94 pence.
U.S. Dollar –The G20 said that nations were intent on halving their budget deficits by 2013 and that debt-to-output ratios should be stabilized within a further three years. And while there was no common agreement on levying a tax on the banking system similar to that imposed by Britain last week, leaders note that there is a consensus to bolster the capitalization of the banking system in the years ahead. The dollar has so far not travelled too far as a result of the statement from the G20. There were no shocks and the showdown on fiscal policy that the Toronto summit promised delivered a suitable compromise instead. The dollar index has advanced 0.16 points to 85.46 in early trading.
British pound – The pound has just turned lower against the dollar after earlier rising to $1.5071 and close to Friday’s high putting the unit at its highest since May 6. The pound continues to feel a boost after the recent budget, which won the endorsement in investment rating at least, at Fitch. The pound also managed to stay in positive territory against the Japanese yen and is trading at ¥134.54.
Aussie dollar – The G20 conclusion failed to boost risk appetite, while it certainly didn’t detract from the recovery story at least. The Aussie closed out last week pretty much on a high and this morning has given some of that rally back as it stands today at 89.39 U.S. cents. The ongoing saga over the proposed super-tax on mining companies continues to dictate the fortunes of the Aussie. The softer approach from new Prime Minister Gillard should help shore up confidence that Australian minerals companies can undertake proposed projects, which the earliest 40% super-tax would have rendered unprofitable.
Canadian dollar – The Canadian dollar put in a decent rebound in light of the Toronto summit hosted by the Canadian government. Its largely unblemished fiscal record is the best among developed nations and it played a key role in creating a developing the discussion framework for nations this time around. It benefits today from a stronger U.S. dollar and from its firmer fiscal stance. The unit rose to 96.60 U.S. cents this morning.
Japanese yen –The yen remains a viable risk aversion play and with ¥89.25 against the dollar coming under test several times recently, one wonders whether the level will hold or whether a bout of risk aversion might send the yen surging. At the end of this holiday weekend the latest June employment report is scheduled to show a net decline in job growth. That might spur further defensive yen purchases during the week.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com
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