The fortunes of the euro have slumped to the worst in more than a month as investors’ attitudes towards the single currency have gone through a subtle shift. No longer is the unit seen through the rosy spectacles displaying economic traction in the core Franco-German hub. Instead investors are distracted by an ugly site demanding attention in their peripheral vision, of lesser nations wading through a quagmire of slowing growth and in desperate need of fiscal repair.
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Euro – Germany’s Handelsblatt newspaper today suggests that EU member states are checking to see whether Ireland is in need of accessing the €750 billion emergency fund set up earlier this year as a zone-wide solution to solving future solvency issues. A slump in Irish banks share prices today despite relatively stable government debt prices has helped refocus investors’ perceptions of the euro in light of other negative news. The Spanish economy came to a standstill in the third quarter after two periods of improvement as the government dishes out a medicine known as austerity. France backed Germany’s call to implicate private debt buyers in the restructuring and inevitable losses arising from future sovereign debt crises. The euro fell against all of its major trading partners and currently stands at $1.3712.
U.S. Dollar – The dollar had a whacky midweek session as dealers watched its value surge before sliding from its highest reading in two weeks. Ahead of this weekend’s G20 meeting at which officials will discuss exchange rates the dollar has rebounded by 3.4% from its weakest point after the FOMC announced its second bond purchase plan. Many governments accuse the U.S. of trying to deliberately devalue the dollar in order to spur growth but with the dollar responding in contrarian fashion after the Fed, U.S. officials might have a stronger point to add to the discussions. The performance of the dollar index during the past five days is its best in three months. Today the index rose 0.4% to 77.95.
British pound – Traders continue to favor the pound as they weigh up how the Bank of England could follow the footsteps of the Fed delivering a potentially dilutive blow to the currency in light of deterioration in the inflationary profile. British bond prices slumped in the aftermath of the change of heart at the central bank and in so doing offered an even greater appeal to sterling buyers. The Bank raised its near-term expectation for inflation and said that at the end of its two-year time horizon, prices were equally likely to be above or below its 2% target. This report was the first since the government announced details of its spending squeeze, which presumably the Bank has now factored in. In light of a recent GDP report showing growth in the third quarter was twice the expected pace, buyers have flocked to the pound. The big question for next year is what impact spending cuts and the loss of 500,000 public sector jobs will have on consumer spending and growth. The pound rose against the dollar to $1.6146 but still short of last week’s $1.6300 peak. It also rose to its strongest in six weeks against the single currency, which today buys 84.83 pence.
Japanese yen – The yen trades unchanged versus the dollar at ¥82.25. The dollar/yen pair is building a triangle formation in which case the dollar’s recent strength will either continue or reverse. Overnight data from Tokyo saw machine orders for September decline by 10.3% reversing a gain of similar magnitude for the previous month. The yen rose against the euro, which today buys ¥112.78. Against the pound the yen declined to ¥112.78.
Aussie dollar – Strong Chinese data and signs of weakness in the Australian labor market have kept the local dollar struggling to remain above par with the greenback on Thursday. Beijing released data showing its factories produced more and its consumers bought more while the inflation picture worsened. The inflation picture for October worsened, however, as prices accelerated above forecast from 3.6% to 4.4%. Earlier in the week the Peoples Bank raised reserve deposit requirements in an effort to further restrain bank lending. Today’s data also showed banks lent more cash than was expected. In Australia even though one report showed 29,500 new jobs were added last month a separate report showed the overall rate of unemployment rose three-tenths to 5.4%. Analysts are disappointed by today’s report because of the mix in the make-up of jobs. A net 14,100 full-time positions were lost meaning that the bulk of gains were concentrated in the part-time sector accounting for why the overall rate rose. The Aussie trades at $1.0010 U.S. cents and has weakened against the yen to ¥82.38.
Canadian dollar – The Canadian dollar is losing out to the greenback today and has fallen to purchase 99.58 U.S. cents.
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.
