A widely-covered story over the weekend claiming that an American scientist was shown a previously unknown nuclear plant in North Korea took on deeper meaning today after troops from the North launched an assault on a Southern island close to the border. The escalation of an age-old conflict resonated across financial markets following the scientist’s observation that the uranium-enriching facility could possibly be used to make atomic weapons. The dollar, Swiss franc and yen all rose while dealers are taking a dimmer view on the prospects for the euro. It’s no longer whether the bailout discussions will result in a deal that’s at issue. It’s the will of the people to swallow a package that shifts banking liabilities onto the books of the government. Such was the discontent across the nation yesterday that the Irish government was left with no alternative but to call a general election in January.
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Euro – Bailing out weaker partners is fast becoming seen as little more than strapping a band-aid on a gaping flesh wound. Fervor surrounding a package last week was played down by ruling lawmakers while welcomed by investors hoping that contagion could be contained with the backstop of financial aid. The apparent ease with which the cabinet accepted the package led the leader of the Green party to declare that the Prime Minister had misled the Irish voters in the past several weeks and tore his party’s support from an already slim majority. Efforts by the Greek government to adopt an austerity package in exchange for billions of euros in aid from fellow EU nations are also proving tricky. Contributions from some members are being withheld after accusations that its fiscal plans are failing to deliver an agreed upon deficit reduction. Increasingly investors appear to be losing faith in the ability of a bailout to reduce volatility and risk, which explains why the euro is once again on the wane this morning, trading down to $1.3553. Last week’s lowest point at $1.3448 is hardly far away.
U.S. Dollar – The dollar index at 79.00 is 0.5% stronger in light of euro weakness and safe haven demand. Global stock indices fell overnight while U.S. equity index futures are on the decline following only a minor fall on Monday. Later today the minutes from the Fed’s November 2-3 meeting will be released and investors will look for further clues about policymakers’ fears and aims surrounding the latest round of quantitative easing announced at that time. Housing data for October is expected to show little reprieve for the depressed real estate sector with existing home sales likely to dip by 1.1% to an annualized pace of less than 4.5 million units. Revised third quarter GDP data is likely to show the series revised up from 2.0% to 2.4% this morning.
British pound – The pound fell against a stronger dollar as appetite for higher-yielders and recovery plays fell after the exchange of fire across the Korean border. The pound is, however, off its lowest point of the session and is not suffering the same ugly fate pater-wise as is the euro. Home loan data released today by the BBA showed a decline to the weakest pace in 19 months. The pound advanced against the euro, which today buys 84.77 pence.
Japanese yen – The dollar surged briefly after reports of North Korean shelling of a southern island sending the yen to ¥83.84 and its weakest in seven weeks. The yen recovered its poise as broader safe haven demand supported the unit dragging it back to ¥83.25. The yen rose per euro to ¥112.53 and strengthened to ¥81.58 against the Aussie dollar.
Aussie dollar – Investors watching Asian stocks swoon and commodity prices fall fast-ditched the Aussie leaving it a penny lower against the greenback at 97.82 U.S. cents. The MSCI Asia-Pacific index shed 2.2% overnight as dealers watched the Irish situation turn around while the escalating Korean conflict merely iced the cake. In early New York trading the Aussie is fast-heading for its intraday low at 97.75 cents, a break of which would leave it vulnerable to last week’s low at around 97.25 cents.
Canadian dollar – Government data showed an unexpected uptick in price pressures for October. The monthly change in CPI accelerated to 0.4% leaving prices 2.4% ahead of a year ago. In September that annual pace stood at 1.9%. Meanwhile the government’s favored core measure of CPI rose on the month at twice the previous pace for an annual increase of 1.8% defying expectations of a decline in the pace of increase. The Canadian dollar spiked on the news as dealers anticipated resurfacing discussions on timing of monetary tightening. However, the move was swiftly reversed as the tide of risk aversion supported the greenback.
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.
