Euro declines as Italy steals the limelight

A rebound for risk appetite that began with a snap in several daily declines for Asian stocks appears to have yielded to yet another round of dollar and yen buying in early morning trading. A healthy Eurozone GDP report initially provided support for the euro only to see the Italians run off with the Oscar following a dramatic government bond auction, which highlighted the fragility of less healthy peripheral nations.

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Euro – The 1.27 bid-to-cover ratio at today’s Italian government bond auction marked a deterioration in the attendance compared to the last sale. Today the Italians sold five and 15-year maturities and had a hard time selling it all. The poor showing eclipsed second quarter GDP reports illustrating the significant economic recovery that had caught so many investors unaware. However, the fact remains that the data is now backwards-looking and the European growth recovery has been updated in traders’ mindsets. The new kid on the block remains the lingering story of the fiscal health of debt-burdened governments. After recovering some of the week’s losses the euro’s rebound to $1.3006 ran out of steam before the euro sank to an intraday low at $1.2776.

Japanese yen –An overnight dip in the value of the yen against the dollar has also run out of steam this morning. The dollar rose to buy ¥86.18 at its strongest overnight reading as political voices shouted louder messages to their deaf-eared cohorts at the Bank of Japan. The central banker continues to perform market monitoring studies to assess the impact of a rising yen and falling stock prices before deciding on whether to act. According to the Asahi Newspaper, next week Governor Shirakawa will meet Prime Minister Kan to discuss the strength of the currency. The current vacillations of the yen are dependent on the “will they, won’t they” battle going on between traders wagering on whether the BOJ dare intervene to curtail the yen’s strength. The biggest deciding factor is whether they perceive they will succeed through selling the yen. Inevitably, official market intervention becomes a red flag to bulls wanting to test the backbone of even coordinated intervention. For the Bank of Japan, timing might be everything.

U.S. Dollar – The dollar has pared some earlier strength after equity futures recouped losses following data showing July retail sales grew 0.4% for the first monthly gain in three. The report fails to live up to the market’s growing fears of this week that consumption is on the rocks after the FOMC said it would retain a neutral balance sheet position through spending proceeds of maturing mortgage securities on treasury bonds. Since the moment of the announcement, tension has risen and markets have fallen, providing a life raft for a sinking dollar. The dollar index is stalling on what would be a fifth daily gain.

Aussie dollar – The Aussie was also tripped up by dashed hopes surrounding Japanese currency intervention. Investors came out on a bullish tack after Asian equity prices suddenly turned around after four daily losses. Risk appetite was suddenly back on the table and the Aussie spiked higher to reach 90.35 U.S. cents. However, it later gave back around a whole cent during European hours as investors watched the red carpet of risk aversion roll out to greet the weak results at the Italian debt auction. The Aussie has since recovered to stand at 89.73 cents and at this price will close at its first weekly loss in three against the dollar.

Canadian dollar – A strong reading of new motor vehicle sales for June reminds investors of the health of the domestic economy. Statistics released showed a forecast-beating 2.5% gain in sales within which the report showed the strongest run of truck sales beating passenger car sales since data was first collected in 1946. Along with a decent reading of U.S. retail sales the report has provided some support for the Canadian currency today at the end of a bad week. Selling of the loonie tapered towards a three-week low at 95.25 U.S. cents and the unit is once again higher this morning at 96.13 cents.

British pound – The British pound rose during a relief rally to buy $1.5651 after Eurozone growth for the second quarter was greeted with loud applause. However, the tone soured on the reminder of the parlous fiscal health of regional governments causing sterling to slip back to $1.5579 before recovering to $1.5603.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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