The euro has reversed sharp losses incurred after Moody’s warned over the likelihood over a Spanish debt downgrade. In so doing, the single currency has unwound an earlier surge in the dollar index brought on by a bout of risk aversion. Moody’s said it might put Spain on negative watch for a possible downgrade, remaining concerned not so much that it will ultimately need a bailout, rather than the overall funding requirement leaves it vulnerable to stress throughout 2011.
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Euro – The warning over Spain from the ratings agency comes a day ahead of an EU summit at which leaders aim to draw a line beneath the sovereign debt crisis. Already German Chancellor Merkel has ruled out a further enlargement of the €750 billion bailout pool. Moody’s points to a €170 billion funding requirement by the government in 2011 along with regional requirements adding up to €30 billion combined with a total of €90 billion worth of bank bonds maturing next year that will keep up the pressure on the nation. Investors are likely to approach funding dates with trepidation, causing domestic spreads over core-European bonds to remain lofty. The euro slumped on the news falling in mid-European trading to $1.3285 according to Interactive Brokers data. However, the mood seems to have become more subdued as the early morning in New York progresses with the single currency wiping out its losses for the day and returning to $1.3375.
U.S. Dollar – From time-to-time the FOMC startles investors with its own assessment of the way the world looks leading investors by the nose as it does. Typically, overly optimistic or overly pessimistic investors are forced to abandon their views and follow the Fed. The silence surrounding the Fed’s Tuesday statement spoke volumes with the market begging to disagree with the central bank’s outdated assessment of the health of the economy. The Fed has been singing from the same hymn book for so long that perhaps it deserves a chant from the market in the shape of rising 10-year yields – the ultimate arbiter of growth. The dollar was boosted in the aftermath of the Fed’s statement on account of a continued surge in note yields, which reached 3.50% for the first time in seven months. A small bout of risk-aversion on Wednesday earlier boosted the dollar index as wobbles emerged again in the Eurozone, but the turmoil appears to have subsided for now. Tame consumer prices for November coupled with a strong rebound in the Empire State manufacturing index have buoyed the dollar at 8:30am ET.
Aussie dollar – The Aussie spent 13 hours trading above par with the dollar on Tuesday only to fall from grace after risk appetite was tempered overnight. The unit had little to trade off in the Asian time zone except a report showing new motor vehicle sales rose 0.2% in the month of November. A minor rise in the Westpac consumer confidence index failed to keep up demand for the Aussie, which eased on more chatter over Chinese monetary ambitions for 2011. The Aussie reached a low point earlier at 98.91 U.S. cents before rebounding to 99.54 cents.
Canadian dollar – The Canadian dollar fell to 98.86 U.S. cents while risk-off trading was in force earlier and before the unit flexed to reach 99.33 cents when the greenback’s guard was down. The Canadian remains insulated against a strengthening economy to its south and is buoyed by flows into North America.
British pound – The pound continues to trade in time-honored style and has reversed course sharply after reaching new peaks. Only yesterday the currency bought more than $1.5900 while in today’s session the slide is highly notable with the pound now down close to $1.5625. Jobless claims fell only marginally less than expected at 1,200 last month and the claimant count remained at 4.5%. The ILO standard measure rose two-tenths to 7.9% remaining well below that of several European neighbors. More optimism from trade body CBI showed retail sales grew faster than most had projected with its index up from 43 to 56 and despite a predicted dip to 38. The pound is half a penny cheaper per euro at 85.37 pence.
Japanese yen – Another volatile session for the yen as it weakened to ¥84.10 before reversing to ¥83.60. The Japanese unit was unfazed by a broadly in-line fourth-quarter reading for the Tankan survey, which showed manufacturers struggling to benefit from rising overseas demand in light of an appreciation in the yen.
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.
