European session pressure on the dollar came to a brisk halt in early New York trading with the euro, pound and yen each surrendering gains to the greenback in rapid succession. Investors were encouraged over the prospects for a Portuguese auction following comments penned by EU Monetary Affairs Commissioner Ollie Rehn who urged cohorts to soon consider reinforcing the scope of the Eurozone’s current and emergency backstops and enhancing the degree of flexibility of the measures.
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U.S. Dollar — Earlier losses for the dollar have rapidly given way as investors digest the words of Commissioner Rehn. “We need to review all options for the size and scope of our financial backstops,” wrote Rehn in the Financial Times. But the obstacles to an agreement remain sizeable not least because the decision to raise the lending ceiling of the €440 billion emergency fund would set off a new round of required parliamentary approval. Given that path would neither be smooth nor swift, the dollar has overturned an earlier wave of selling. The dollar index is flat at 80.75.
Euro — The euro rallied to its highest since last Thursday in European trading reaching $1.3045 as French and German officials praised the efforts of the Portuguese government in taking tough measures to rein in its public spending and reducing its budget deficit. French Finance Minister Christine Lagarde told domestic television that Portugal was making more progress than it had committed to, urging its leaders to continue since “structural reforms are necessary.” German Chancellor Merkel told reporters that Portugal had taken “very important measures” and appears to be taking them seriously. The euro was also inspired by hopes that officials will next week discuss the effective lending capacity of the Eurozone’s rescue fund. When the EU established the €440 billion European Financial Stability Fund in May last year, in order to maintain a top-notch credit rating the fund was restricted to lending around €250 billion. Hopes that the EU will discuss enhancing its flexibility helped soothe worries beyond a request for assistance beyond a nation the size of Portugal. Such earlier optimism appears to have done its usual trick and was enough to drive the shorts out of the market triggering stops as they hit the exits. The euro has subsequently eased to an unchanged value of $1.2975.
Japanese yen — The yen strengthened in Asia against the dollar reaching ¥82.98 following a thirteenth straight decline in bank lending. Bank of Japan data showed outstanding bank loans fell by 1.9% in December following a 2.0% decline in November. Bankers face a hard time finding companies wanting to borrow to fund investments meaning the central bank will maintain its ultra-low borrowing costs for as far as the eye can see. The current account surplus in the year through November also declined according to a separate report making for the first year-on-year decline in three months. As equity prices remained elevated around the world for a second day demand for the yen fell allowing the dollar to turn losses into gains on the day reaching ¥83.32.
British pound — The pound fell from its highest in a month following the largest trade deficit since 1980 when records began. Having touched $1.5681 ahead of the £8.7 billion shortfall in trade the pound has fallen back to an unchanged reading of $1.5600. The November trade report was expected to narrow to £8.3 billion following a reading of £8.6 billion in October. The pound also gave up small gains against the euro and trades slightly weaker per euro at 83.22 pence. The Bank of England starts a two-day meeting on Wednesday to discuss the health of the economy against a backdrop of stubborn inflation.
Aussie dollar — Reserve Bank board member Warwick McKibbin told the Sydney Morning Herald that he expects growth to be pared by as much as 1% as a result of the floods hitting Queensland. The rising waters are expected to continue for two more days before levels subside. Australia’s dollar took another pounding overnight and reached a one-month low at 98.04 U.S. cents. However, broader appetite for risk building on strengthening demand for equities around the world on Tuesday helped the Aussie unit reverse course in midweek trading lifting it to 99.23 cents in European trading. The local dollar was also helped by housing data released earlier. As equity prices gathered steam demand for the Japanese yen also waned allowing the Aussie to rally to ¥82.33.
Canadian dollar — Swollen by growing confidence in the world recovery and rising commodity prices the Canadian currency today traded up to $1.0136 the strongest since May 2008. The Canadian unit is also benefitting at the expense of the Aussie dollar as the Queensland floods take their toll. The Aussie has shed five cents recently against its commodity-sensitive counterpart reaching a four-month low at 97.05 Canadian cents this morning.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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