Euro declines as investors seek safety

Risk aversion continues to underpin the foundations of a powerful advance sending the dollar index to a 10-week peak as investors unwind positions vulnerable to an avalanche of fear. For investors confident in the global recovery theme, there remain two stumbling blocks. Eurozone sovereign debt fears have been reawakened in the aftermath of an €85 billion bailout for Ireland. Second, Asian markets are reeling from the prospect of Chinese action to further cool its economy. The traditional triumvirate of risk aversion is very much in demand as the dollar, the yen and Swiss franc leave the currency pack in the mire.

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Euro – Eurozone bulls are fast-sobering up to the reality that relatively little of the €85 billion bailout for Ireland is reaching the banking system. The perception surrounding the recent Dublin-based discussions over the content of a bailout focused on how the fragile banking system would be aided. The banks get to tap just €10 billion of the package. That’s remarkably little in the eyes of some and belittles the impact of the headline number. As investors stand back and cast a cautious eye on what the EC, IMF and ECB have achieved, they are left wondering not what is next, but who is next. The problem of stress on each nation’s banking system seems to be extending beyond the pure-play of a simple provision of billions of euros. Associated risks appear to be increasing with the cost of credit-default swaps increasing as government bond yield spreads test recently set records. The question of whether Portugal will get a bailout of its own seems to have been swept aside as investors ponder whether the joint-authorities can afford to pre-emptively bailout Spain as they look well into the distance to review how much debt the local banking system has coming due over the next 12 months. The pressure drove the euro below $1.3000 for the first time since Sept. 16 on Tuesday, and to put the move into perspective, earlier in the month the euro traded at $1.4200 before the recent panic struck. It would seem that in the aftermath of the strike to heal the fragile European financial system, nervousness over their ability to succeed is taking a step back to precisely where we were six months ago.

U.S. Dollar – The dollar index traded at 81.36 on Tuesday morning as the euro buckled. The daily gain of 0.6% came ahead of the latest round of confidence indicators from the New York-based Conference Board. Analysts expect a rebound in November data, which would mesh nicely given the anecdotal evidence beyond the Thanksgiving holiday.

British pound – A GfK NOP consumer confidence survey reflected a dip in the attitude of British consumers last month. Both the current and forward-looking measures dipped a couple of index points dragging both down to around minus 22. The pound continued to rise against the ailing euro, achieving a nine-week high along the way. A euro currently buys 83.77 pence, and its 3.5% decline throughout November is its biggest monthly loss since January 2009. The pound did, however, decline against the dollar shedding half a cent to stand at $1.5518 ahead of U.S. data on Tuesday.

Japanese yen – In the face of Eurozone worries, the dollar rallied against the Japanese unit on Monday to reach its best level since late September. However, risk aversion took a second-coating today in the form of an article appearing in China Daily in which an economist at the Chinese Academy of Social Sciences argued that domestic interest rates should be raised by 2%. Asian dollars weakened at the prospect of further deliberate measures to cool the fast-growing Chinese economy. That also helped regional demand for the yen rather than the dollar, which slipped to ¥83.89.

Aussie dollar – The double-dose of bad news was too much for the Aussie dollar as risk-loving investors were forced to abandon ship once again, sinking the currency to an eight-week low vs. the dollar. The unit just reached 95.00 U.S. cents as nervousness grows once more. The Aussie was earlier buoyed by a higher-than-expected reading of building approvals during October where the data showed a 9.3% increase. However, the weight of a 3.4% lunge in the Shanghai stock index is proving more than investors can bear at this point and the Aussie continues to look top-heavy.

Canadian dollar – The loonie is faring marginally better than the Aussie dollar on the logic that a recovering U.S. economy is more favorable than a Chinese economy where the authorities are being urged to mop up excess liquidity through more than simply raising reserve requirements. Also working in favor of the Canadian dollar is the rising price of crude oil, which currently stands at $85 per barrel. The Canadian dollar buys 97.70 U.S. cents shortly ahead of the release of third quarter GDP data.

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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