Forex risk resumes as hopes for ECB reprieve grow

The waters were clearly too cold for even the bravest traders earlier in the week as they sold the euro below $1.3000 for the first time in 10 weeks. On the eve of the ECB’s monthly meeting on Thursday, attention has shifted away from schisms in the bailout infrastructure and towards whether the ECB will shy away from gradually removing emergency liquidity measures. By reassuring the markets that liquidity will be provided in abundance, the pressure will be temporarily lifted from the euro, vilifying today’s stampede in the opposite direction.

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Euro – However, one of the biggest strengths the euro embodied over the summer was the fact that the ECB was capable of drawing a line beneath its emergency measures. By comparison this created a weaker environment for the dollar as the Fed continued to stroke market expectations on further steps to bolster the recovery. And so Tuesday’s message from ECB Governor Trichet that future bond purchases can’t be ruled out brings the euro back into alignment with the dollar. With such optimism today over a palatable outcome at Thursday’s meeting risk appetite recovered somewhat by midweek creating strong demand for European equities. The euro was also bolstered by the November reading of the PMI manufacturing report, which showed little change at 55.3 for the Eurozone as a whole. The data from the German powerhouse revealed a more severe decline, but at 58.1 this diffusion index still points to robust domestic growth. The October reading of German retail sales was also remarkably upbeat with a spending gain of 2.3% more than offsetting a September decline of 1.8%, which in the event was also revised indicating a lesser decline than first reported. The euro also rebounded against the yen to stand at ¥109.85 ahead of a raft of U.S. economic data on Wednesday.

U.S. Dollar – The dollar index is lower at 80.92 this morning but the greenback isn’t exactly falling out of bed. As noted above, the euro is recuperating and at $1.3100 has taken a chunk out of the dollar’s worth overnight. The overall tone today is for less risk revulsion than earlier in the week, which explains the dollar’s rally against the yen to ¥83.95 and against the Swiss franc at $1.0047. The dollar faces plenty of tests in the forthcoming session. Already MBA weekly mortgage applications disappointed with a decline of 16.5% in the weekend through Thanksgiving. This, however, is a minor report and who doesn’t already know about the severe weakness in the real estate market? More important today will be the release of the ADP employment report, a precursor to Friday’s non-farm payroll report for November. According to forecasters, private sector employers created 70,000 jobs during the month building on gains of 43,000 the month before. We also have the ISM manufacturing report, due to stand still at 56.5 while the Fed’s preparatory review of the regional economy in the shape of the Beige Book is revealed this afternoon.

British pound – The pound stands firmer on the day as risk appetite warms, although there was little good news from the housing market. The main driver was a sharp and unexpectedly strong manufacturing PMI reading for November of 58.0. Expectations of weaker activity were also made to look balmy by an upward revision to October’s reading. The pound strengthened to as high as $1.5648 according to Interactive Brokers data, while it recently pulled back to $1.5600.

Japanese yen – The yen is weaker against a basket of its major trading partners in early trading as the perceived need to cling on to its safety is diminishing as global stock prices rise. Data was hardly compelling from the island overnight. Vehicle sales fell by 30% in the year through November, while construction orders for the year through October stood 5.6% lower than a year ago. The yen eased against the Australian dollar to ¥81.04 and per pound to ¥131.26.

Aussie dollar – Third quarter growth data initially sent the Aussie unit reeling to a nine-week low versus the dollar to 95.38 U.S. cents. GDP expanded at just half the expected rate through the three months ending September at 0.2% to leave annualized growth running at 2.7%. The economy expanded at a 3.1% pace in the year through June. Nevertheless a decline in pessimism surrounding the Eurozone served to buoy the Aussie in the European session lifting it to a session high at 96.61 cents. A manufacturing survey continued to show contraction in the sector for another month. The AiG manufacturing performance series slipped further from 49.4 to 47.6.

Canadian dollar – The Canadian dollar has rebounded a full cent from Tuesday’s low, which was the weakest reading since Oct. 28 as rising stock markets improved confidence. Acting as a further prop this morning for commodity currencies such as the Aussie and loonie, is a rebound in Chinese manufacturing. The government PMI showed that manufacturing rebounded again during November with the index reading 55.2 from 54.7. The HSBC index tallied with the data indicating further expansion. Dealers chose to ignore the downside of the possibility that the report might prompt further action from the Peoples Bank of China. Just a day ago, this report might have been received rather badly but in today’s warmer waters for risk, it has underpinned risk appetite for equity and commodity classes alike. The Canadian unit currently buys 98.12 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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