The dollar index is off sharply this morning despite ongoing fears over the sustainability of the global economic recovery. Manufacturing data from Beijing to Frankfurt and London all encouraged investors to worry about the potential for a second recessionary wave. However, the key driving factor in the currency world appears to be the credit provisions agreed between Eurozone banks and the ECB. A rise in borrowing costs appears to be insulating the euro, which blasted well beyond its midweek peak and looks like it may well be making a beeline for $1.2400 and beyond.
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Euro – Sentiment was, however, earlier damaged by a Moody’s warning that lack of growth opportunities for Spain has given the ratings agent enough reason to put the nation on negative watch. Today the Spanish authorities successfully shifted all of the bonds it wanted to while the French also pulled off a successful auction. It seems that appetite for government debt remains alive and that fears for Eurozone sovereign risk may be slimming at the margin.
Following Wednesday’s €131.9 billion three-month loan by the ECB, today it awarded a further €111.2 billion to banks applying for funding. Ultimately, there has been a net liquidity drain – not caused by the ECB – driven rather by cash demand from the banks themselves. The effect on the short end of the yield curve has been to drive prices higher and this appears to be driving the euro to significant gains. It reached a high earlier at $1.2379 and given the dynamic nature of the move, once again I conclude that shorts are having no fun in lucking for fast profits from the euro.
U.S. Dollar – The dollar index is lower by 0.95% at 85.26 even as global equity prices retract in response to continued evidence of a slowing manufacturing expansion around the globe. The June PMI in China softened from a 53.9 reading last month to 52.1. The PMI for the Eurozone did, however, come in as expected at 55.6 and unchanged on the May reading. Britain’s purchasing managers’ index came in at 57.5 and down from a 58.0 reading. Later this morning we’ll learn the PMI for the health of the U.S. but it will be tricky to decide whether a bad number will deter from the level of the dollar or whether it will bolster its demand from a risk aversion standpoint. Right now, risk aversion is not boosting the dollar as fears over the fiscally challenged Eurozone appear to soften. Data showing another rise in initial claims in the U.S. reminded investors that the trek to recovery remains a slog – claims rose 13,000 to 472,000. Friday brings the non-farm payroll data from which economists expect job losses of around 120,000.
Aussie dollar – Has the commodity dollar meltdown run its course? That’s the obvious question as equity prices wilt in the face of the PMI data while the U.S. dollar fails to make gains. Today the Aussie bottomed out early reaching 83.16 U.S. cents and as the euro rebounds, so does the Aussie, which last traded at 83.91 cents. Today’s weakness was the lowest level for the Aussie since June 10. Data for the domestic economy failed to provide much respite earlier, however. Building approvals were supposed to remain static in May data, but in the event suffered a 6.6% decline. Meanwhile retail sales data for May also dipped marginally to reflect a 0.2% gain over the previous month.
Canadian dollar – Having reached a three-week low, the Canadian dollar has reversed course sharply this morning and for a risk-off day, the unit is on fire. The local dollar bought 94.50 U.S. cents recently having rallied from 93.63 cents earlier.
Japanese yen – Declines in Asian stocks, inspired by the softening manufacturing stance in China, is keeping a lid on optimism, raising pessimism on the outlook for export-driven economies. The yen is winning a fear-gauge battle with the dollar and today reached its strongest point since December. I’m sure the Japanese export sector will hardly be laughing about the dollar/yen rate of ¥87.71 this morning.
British pound – The British pound had suffered during the latest worries over global recovery. However, it has had quite some run-up lately rallying six cents from $1.4500 since mid-June buoyed by a strenuous budget yet without much of a growth threat. The last two days have seen its fortunes turn somewhat as dealers realize that the pound would be caught up in a global slowdown regardless of how well the Chancellor might have navigated his course for the British economy. The pound fell to $1.4873 earlier in response to some negative discussion for inflation from policymakers. David miles told the Daily Mail that inflation was “uncomfortably” high, but it certainly wasn’t time for a rate increase. His words echo those of another external member of the MPC. However, in a speech earlier in the week BoE Markets Director, Paul Fisher, told an audience that the two-year trajectory for the path of inflation is down and that it made no sense to tackle a presently high rate caused by a spike in food and energy costs. The pound rebounded following a sharp jolt higher for the euro and stands at $1.4973.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers
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