The appeal of risk aversion quickly lost its way midweek leading to a significant rally in U.S. equities that fed Asian market appetite overnight. The euro reached its strongest point in two months rising in Asia to $1.2687. Risk appetite flourished after a far stronger reading for Australian employment, which caused investors to think twice about slowing emerging market economies. An IMF report today also highlighted the leadership of the so-called BRIC nations as it upwardly revised its global growth forecast.
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U.S. Dollar – Risks to the recovery remain intact according to the quarterly review of global economies from the IMF. Today it boosted its forecast from 4.2% to 4.6% growth for 2010 making for the healthiest pace of growth since 2007. The leg-up stems from a better first-half performance. While growth for 2011 remains static from an earlier forecast of 4.3% it still sounds like a healthy pace. Rising expansions in Brazil, India and China are softening the blow from concerns over sovereign defaults in Europe. The report reflects on the recent turmoil experienced in financial markets in response to giant question-marks over growth prospects in light of fiscal measures and other policy responses.
Euro – Meanwhile the IMF also urged the European Union to collectively take measures to assure investors that its banking system was stable. Policy has to be coordinated before confidence can be regained. Investors have slowly been edging back into the comfort zone with the euro currency as more and more is revealed about the stress tests in progress covering up to 100 banks in and around the region. ECB President Trichet is expected to expand on the situation at lunch-time in Europe after the central bank’s monthly meeting.
Earlier stress-testing of the Spanish banking system allowed investors to breathe easier, which is why the EU has expanded the testing to all of the Eurozone. Onlookers had been braced for the testing process to stress banks’ holdings of Greek government debt to reflect losses of as much as 60% in the event of a government default. But more recently banking lenders have let it slip that regulators are assuming far smaller losses of 17% on Greek debt and only 3% on Spanish debt in the event either nation defaults. If this is true then on reflection the rally in the euro makes far more sense and in the bigger picture confirmation of this set of rules might spur gains all the way to $1.3000. Overnight in Asia the euro surged and has since come back to $1.2648.
Japanese yen – While the IMF sounded relatively upbeat, the Japanese continued to reflect precisely what the fund was warning. Bank of Japan Governor Shirakawa today remarked on the elevated risks emanating from the European sovereign debt crisis as he discussed the latest batch of weak Japanese data. A rising yen and a lack of corporate confidence in the recovery around the world created the biggest slide during May for machinery orders. The figures show a 9.1% slump in tool and capital orders, which was the largest in two years. Coincidentally May bank lending also slumped at its fastest pace in five years as companies shunned the need to replenish capital projects.
However, the dominant regional news was the Australian employment data and a broad rejuvenation of the risk rally that led to yen falls today. The dollar jumped back above ¥88.00 having reached almost one yen lower in the previous session. Against the euro the yen slipped to ¥111.50 while the pound strengthened to ¥133.41. Against the Aussie dollar the yen slid to ¥76.91.
British pound – June house prices fell 0.6% on the month according to the Halifax Building Society, while a negative backwards revision to April manufacturing output data also harmed the pound. The currency earlier made a run for its strongest level in two months against the dollar by reaching $1.5241. Today the Bank of England announced an unchanged policy stance. The ongoing series of fresh advances illustrates investor confidence in the pound relative to a euro with deeper worries, but for the time being it will appear hamstrung while investors can get off the fence over whether the spending cuts ushered in by the budget are onerous enough to tip the economy into recession. The pound eased against its European counterpart to 83.60 pence. It also shed more than two cents to an ebullient Aussie dollar.
Aussie dollar – The Aussie was propelled higher by a strong labor market performance in June, which can only indicate longevity of its economic recovery. Payrolls surged by more than the 17,500 forecast to show 45,900 new positions were taken up leading to a decline in the unemployment rate to 5.1%. And with the IMF underscoring the point that the performances of China, India and Brazil are leading the way forward, investors flocked to the Aussie unit, which surged to 87.50 U.S. cents. Investors in their actions today wondered out loud whether the RBA might have to rewrite the monetary script later this year after all.
Canadian dollar –With markets morphing from a red-alert to green-light status on Wednesday that meant a rally for commodity prices including Canada’s largest export, crude oil. The risk appeal tone continues on Thursday and that means the Canadian dollar enjoys a second day of revival spurred on in part by the Australian data. Today the Canadian dollar buys 95.73 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers
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