Euro relief toppled by political turmoil

The euro felt the full force of political turmoil following an announcement of a key political ally. As if having to deal with shoveling out the banking system isn’t enough, the Irish government with a paper thin majority reliant on the support of Independent politicians, today lost the support of the Green Party leader, saying it was time to put a general election on the agenda for the second half of 2011. The resignation will follow a premature budget brought forward by a week or two to coincide with a weekend rescue package to prevent Eurozone contagion. The relief felt by the euro in early European trading in response to the coordinated rescue package has vanished following the onset of political turmoil.

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Euro – The euro rose to its best level in a week against the dollar reaching $1.3755 as dealers digested news of the weekend package. Speculation remains as to the precise amount and even Finance Minister Brian Cowen failed to speculate on its size. He did state that he suspected it would be less than €100 billion, which would still be equivalent to 60% of Ireland’s GDP and would compare to a Greek rescue sum equivalent to 47% of its national output. The resignation of Green leader John Gormley sent the euro reeling to a loss on the session to $1.3670. Mr. Gormley said that his party will resign from the government after this week’s budget, which along with the EU discussions takes precedence over politics. Prime Minister Lenihan’s government only has a three seat majority and faces a tough weekend election. What impact a total loss of majority would have on the recent bailout is unknown, but what we do know is that markets don’t like uncertainty.

U.S. Dollar – The dollar index reversed earlier losses to stand higher at 78.53 as creeping thoughts of contagion once again resurfaced following the swiftly souring news within Ireland. Many had perceived that the dollar would reverse its recent gains after Europe resolved the build-up of pressure as fortunes over the Irish situation were resolved. Many thought the euro was merely having a sour patch. However, the reality is that the dollar’s value has risen more than 5% since the FOMC announced its resumption of activity in the bond market. On Tuesday the Fed releases the minutes of its recent meeting and we expect to learn more perhaps about the divisions within the policy-making committee as well as what fears or risks can be expected as a result of taking its course of action. Also on the slate for this week is third-quarter GDP, which is expected to pick-up the pace of growth to 2.4% on an annualized basis.

British pound – The pound dropped by more than a cent following the changing political landscape in Ireland. Britain appears to be backing the rescue plan and is set to contribute to the bottom line. Considering British banks and corporations are most heavily exposed to Ireland holding some $222 billion in Irish assets as at the end of March 2010 according to BIS data, you can see why there is a pressing desire to protect Britain’s weakened banking system. The pound is marginally firmer per euro at 85.49 pence.

Japanese yen – Global stocks had responded well to news from Dublin over the weekend. The perception that contagion might be reduced provided a green-light for risk and helped reduce demand for the Japanese currency. It does, however, remain a little firmer against the dollar at ¥83.50, while it is rising against both euro and pound. In terms of the Aussie dollar the yen is unchanged at ¥82.45.

Aussie dollar –The Aussie is suffering on Monday on account of the travails of the single European unit. The pattern playing out on the chart is practically identical as risk appetite returned only to be swept off the table as Irish political news struck. However, the Aussie is clinging onto an intraday gain against the dollar and stands at 98.77 U.S. cents unlike the sliding euro.

Canadian dollar – The Canadian dollar has also returned from a six-session peak to about unchanged on the day as demand for the greenback swells. Stock futures have pared gains while commodity prices are also on the wane in response to the vigor displayed by the dollar. The Canadian unit currently buys 98.29 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.

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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