Euro fails to rev-up to more Chinese overtures

Wednesday brings another reprieve for the euro after reaching a three-week low on Tuesday as sentiment flopped with traders giving up their posts for the year. The Financial Times claims that China has assured European officials that it will take further action to support European stabilization efforts, which are assumed to be further purchases of higher-yielding government bonds. With two-way trade flows of $434 billion in the first 11 months of the year, the EU represents China’s largest export market and appears eager to defend its established trading interests.

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Euro – The euro appeared heavy throughout Tuesday’s trading session and ultimately broke to a three-week low at $1.3074 against the dollar in early afternoon trading. Earlier in the day the unit has struck $1.3200 and the pattern may yet repeat itself midweek. The breaking story suggests perhaps a further €4 billion purchase from China into bonds issued by Portugal whose credit rating was put on negative watch by Moody’s earlier in the week. China has pockets deep enough through its massive foreign reserves to sit on a stash of bonds to maturity and euro bears are eyeing the impact of the story with curiosity. Whether Chinese support for first Greece and now Portugal will be enough to draw an end to this years’ drama for the euro remains to be seen, but I doubt it will. Today’s kneejerk response lifted the single currency to $1.3181, failing so far to beat Tuesday’s high and living proof that sellers remain convinced that any rebound remains an opportunity.

U.S. Dollar – The picture may change should midweek U.S. data disappoint. Dealers expect an upwardly revised third quarter GDP report accompanied by a 7% rebound in home sales last month. Both pieces of data have the capacity to put the dollar back in the driver’s seat and lift the dollar index from a sloppy start. The early news that Portugal may feel the benefit of Chinese bond purchases has again cleared the decks for a further bout of rising risk appeal, lifting higher yielders. The Swiss franc has also been somewhat of a star performer lately as investors seek its safety qualities. In so doing, the franc has risen by 19% so far in 2010 versus the euro while it’s gained 9% against the dollar. Earlier this month it also broke through a 2009 low per pound and now stands at a record high.

Canadian dollar – The risk-on tone earlier provided a big push to the Canadian dollar after a drab performance on Tuesday. The strong retail sales report on Tuesday had the ability to push the loonie higher, but optimism was doused by a weaker inflation report. Earlier today it appeared investors were ready to put the Canadian unit back onto their holiday shopping lists and drove it to 98.72 U.S. cents. However, gains have been pared and the unit sits at 98.34 cents.

Aussie dollar –After failing to build on an intraday rise on Tuesday, the Australian dollar closed lower. However, a dip in Korean tensions and an apparent willingness by the North to allow observers to review its nuclear facilities has tempered geopolitical concerns and is boosting higher yielders in Asia. The Aussie also found support from a Westpac leading index report compiled from October data, which saw its headline number rise 0.3% from an unchanged reading for September. The Aussie poked its head above $1.00 for the first time in two weeks but has since eased to 99.80 U.S. cents.

British pound – The British pound continues to trend lower with today’s impetus coming from a downwardly revised GDP report for each of the second and third quarters. Not long ago the shoe was on the other foot after a preliminary reading of third quarter growth was doubled astounding onlookers at the pace of rebound for the economy. Today’s marginal revision by 0.1% to an annual pace of growth of 2.7% is nothing in the big picture but comes ahead of a January sales tax increase that is expected to put a dent in consumer activity. The pound reached $1.5426 where it has not traded since mid-September and ahead of the FOMC’s announced intention to re-embark on further quantitative easing. Minutes from the December MPC meeting released today confirmed an ongoing 7-2 division amongst the policy making members who agreed to maintain steady policy.

Japanese yen – Since the dollar peaked at ¥84.51 precisely one week ago, the yen has trended higher (dollar lower) and has traversed a channel spanning approximately ¥1.60 wide. Earlier dollar weakness saw buyers drive the yen to as high as ¥83.41 although still short of the channel base at around ¥83.31 today. A pickup in the value of the dollar ahead of GDP and home sales data leaves the pair right in the middle of that channel at ¥83.57.

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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