Euro yoyos as Germany vows to close cash spigot

IB FX Brief: Euro gains vanish as Moody’s reminds over euro-chasm

In a sign of just how thin markets are becoming as traders wind down for the holiday season, the euro surged by more than a cent on the day against the dollar before fickle traders abandoned their positions, allowing the euro to lurch into the red. Earlier hopes for something more meaningful than an amendment to the wording of a key European treaty have vanished leaving investors with a sense that events in the future are far from clear. The loser is the single European currency unit.

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Euro – The initial optimism to the news breaking from Brussels was taken to be positive for the euro. As the main banker to financially insolvent nations, German voters have kept up pressure on its government to commit no further cash to the bailout plans. Chancellor Merkel also knows that legal challenges at home will be made should she fail to tow the line outside her country. The Lisbon Treaty was amended to state that help could be triggered by struggling nations but that bondholders may face losses in the process. The euro jumped to $1.3359 while an IFO-confidence survey caused more buying. The German business climate index and an index of future expectations rose to the highest since German unification in 1991. Both were predicted to ease back from a string of strong readings. The euro bulls appeared vindicated before Moody’s reminded us that a strengthening German economy contrasts sharply with health in Europe’s nether regions. The ratings agency slashed five notches from its rating of Ireland causing something of a reality check for the euro, which has subsequently slumped lower on the day at $1.3246.

U.S. Dollar – The dollar index is now firmer after a wobbly start and stands at 80.16 this morning. Bolstering the dollar is the ongoing recovery in various strands of economic data, the latest being Thursday’s initial jobless claims measure, which remained close to its lowest in two years and inspiring hopes that employment is genuinely on a recovering path.

Aussie dollar – After an overnight rally in Asia as stocks advanced and the backdrop to European talks appeared to look positive for risk-on trades, the Aussie is now suffering against a stronger greenback. The Aussie has slipped from a peak at 99.26 U.S. cents to 98.54 cents as risk appetite fades.

Canadian dollar – Suffering deeper losses, however, is the Canadian dollar, which slid sharply in early New York trading. With commodity prices suddenly losing some of their appeal as the greenback rebounds, losses for the loonie were exacerbated by an initial slide in the price of crude oil couples with losses for gold. Both have since stabilized and in fact are advancing on the day. From a peak earlier at 99.44 U.S. cents the Canadian dollar slumped to a session low at 98.60 cents.

British pound – The pound hardly budged at the same time as the euro earlier, but it certainly got dragged down in its wake. The pound was also influence in part by a Nationwide Building Society confidence report showing a third consecutive decline in consumer attitudes. The November index slipped seven points to 38 and along with an index of future expectations reached a 20-month low. While these indices contradict other more robust data points recently, it’s hard to ignore then in light of a planned 350,000 job-cutting exercise across public servants in 2011. As part of the tax-raising austerity plans, retailers will pass on a 2.5% increase in sales tax effective January 1. The pound slipped from a $1.5634 close on Thursday to $1.5509 by mid-morning New York trading.

Japanese yen – The dollar rebounded against the yen from an overnight low at ¥83.69 to a new session high at ¥84.09 recently. Demand for the yen has waned throughout the week with the Asian unit set to lose out for a weekly loss against an index of 10 trading partners. The South China Morning Post carried an article quoting Peoples Bank of China Governor Zhou Xiaochuan that further diminished demand for yen safety plays. He stated that the central bank would not raise reserve ratio requirements at the same time as raising interest rates. The yen remains unchanged per euro at ¥111.15 this morning.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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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