IB FX Brief: Gloom sets in to start the week
The week begins with a mix of worries. U.S. earnings season kicks off after Monday’s close and although investors are inwardly optimistic, such optimism isn’t necessarily carried over from some of the recent economic data released. The Japanese government crashed and burned over the weekend as upper house elections left Prime Minister Kan with more than a flesh wound, prompting investors to wonder exactly how the parlous fiscal state might be addressed with less political influence rather than more. And investors feeling starved of information about the European banking stress tests sold the euro in early going on fears that perhaps the report due before the end of the month is too lightweight or fails to encompass enough of the system.
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Euro – The euro came within a whisper of $1.2550 in early Monday trading marking its deepest retracement in six days. Investors are bracing for the European Commission to publish its review of the health of 91 financial institutions within the banking system. And while last week’s news was that the tests maybe less onerous than at first feared, some see that as a negative factor hoping instead for a deeper prod within banks’ balance sheets. Despite the poor outcome for the Japanese government in the weekend elections, the euro lost ground to the yen to ¥111.27.
Elsewhere an unsourced report in Germany’s Der Spiegel ruffled some feathers by claiming that Germany is spearheading an orderly bankruptcy process that would encourage the buy-in of weaker nations in the event of insolvency and debt restructuring. The initiative, dubbed the Berlin Club, guarantees bond holders wishing to buy into the plan 50% of the face value of debts in exchange for their acceptance of any debt rescheduling that would benefit vulnerable nations.
U.S. Dollar – Investors bought dollars ahead of the onset of earnings season, which in time-honored tradition sees Alcoa at the front of the line after Monday’s closing bell. Alcoa’s performance is usually widely anticipated since it’s a Dow component and is a bellwether for industrial and commodity demand. The dollar index rose 0.3% as investors flocked to the dollar.
Canadian dollar –Firm Canadian data last week has very much kept alive the prospect of further monetary tightening from the central bank in one weeks time. The Canadian dollar rose on Monday and trades at 96.82 U.S. cents as investors ready for a further 25 basis point boost in yield. Optimism over the health of the economy was boosted last week when the government’s employment report concluded the largest quarterly increase in payrolls on record. The dollar also benefitted from a jump in crude oil prices as investors wrapped their arms around commodity prices.
Japanese yen – The Japanese yen fell sharply against most currencies in an initial reaction to the Democratic Party of Japan’s poor performance in the upper house elections over the weekend. Prime Minister Kan had hoped to defend the 54 seats held by his party heading into the weekend but early reports show it only held onto 44 seats. What’s worrying investors is that the weakening coalition will now meet political gridlock as it tries to tackle the nation’s monster deficit. The dollar gained strongly to ¥89.15 at its overnight best but has since pared gains to stand at ¥88.58. The yen had strengthened recently on account of rising investor concern over the health of the global recovery. It’s unclear how long the political outlook will overhang the yen and arguably growing economic health will continue to weigh on the safe haven status of the Japanese unit.
British pound – The pound weakened sharply following a pick-up in the first quarter reading of the current account deficit as the report reminded investors that the recovery may have lost steam. The deficit was twice as deep as expected at £9.6 billion and compares to that of the fourth quarter at £1.7 billion. The pound slumped to its weakest point since the start of July at $1.4949 before recovering to $1.5049.
Aussie dollar – The Aussie gave up some ground in early going before recovering from weakness to 87.01 U.S. cents and stands at 87.38 cents. As the U.S. dollar strengthened in early going investors found it an easy story to sell the local dollar on grounds that the recent rally for the Aussie was perhaps too far too fast.
Senior Market Analyst
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