Euro recovery spurred by Eurozone auctions

The euro has clawed its way back to where it was one week ago as investors grow more optimistic that the governments across the Eurozone are committed sufficiently enough to safeguard the survival of fellow nations. A second successful day of bond auctions also proved to be a lower hurdle than had been expected with investors happy enough to pour the maximum amount of money into government coffers in exchange for riskier paper. A deterioration in weekly initial claims in the U.S. has set off a slide in the dollar as the data appears to add more questions to the health of the broader recover in the labor market.

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Euro – The euro rallied above $1.3200 for the first time since January 5 reaching $1.3214 after Spain and Italy both attracted enough bond buyers to sell the maximum allotment up for grabs. The last time such auctions were held was three months ago when yields were admittedly far lower around the world. And while it is true that those governments had to pay 1% more than at that time to fund sales today one must factor into the news the changing climate for yields. Today we’re seeing more of the same news. Euro bears have to quit their short positions as evidence simply doesn’t stack up to support the claim that the euro is about to crack. However, this is again likely to be a short-term phenomenon until such optimism fades. In data news, German wholesale prices disappointed by rising during December at almost three-times the pace in November with a 1.8% increase. Over the year that translates into a 9.5% change. The euro also jumped against the yen to ¥109.56.

U.S. Dollar – The dollar index cratered to its weakest since January 5 as investors bailed out of the dollar and into the euro. Initial jobless claims data didn’t help with the series rising to 445,000 after a reading of 410,000 the prior work week. The data is somewhat surprising in light of the apparent hiring spree across private sector jobs according to the surge in the ADP data series recently, although the jump in claims does appear to corroborate the weaker government non-farm payroll report. The dollar index fell 0.5% to 77.59 on Thursday.

Aussie dollar – A rather weak employment report for December initially sent the unit lower but thanks to a recovery in the risk environment courtesy of Eurozone debt-crisis optimism, the Aussie recovered on Thursday. The unit accelerated in a “touché!” moment following the lighter U.S. initial claims number with investors chasing the Aussie to $1.0019 for its first excursion above parity in seven days. The Australian unemployment rate dipped two-tenths to 5% while the net employment change was woefully disappointing with a mere 2,300 jobs added. In November the gain stood at 54,600 while the December full-time addition simply stood still. The Aussie might have come in for a spanking on Thursday had broader risk appetite not recovered.

British pound – Weakness in the dollar has helped the pound climb for the stratosphere this morning. In recent trading the unit accelerated to $1.5840 adding a cent to midweek gains. The pound’s rise has been aggressive this week with following buying interest beyond a low at $1.5475 on Monday. Factory output data was strong during November according to the latest statistics released today. Manufacturing output repeated a 0.6% increase in October for a seventh consecutive monthly increase bringing the year-over-year pace of gain to 5.6%. Overall industrial production added 0.4% on the month and rose at 3.3% pace over the year. Today the Bank of England failed to cloud the issue and left monetary policy unchanged at its monthly meeting.

Canadian dollar – Ongoing gains in the price of crude oil are proving to make the Canadian dollar a profitable stomping ground for those bullish over its prospects. Coupled with a glowing fiscal outlook, which will make Canada the first major economy to return to a balanced budget, and reservations over the health of European governments, the loonie has put on a few pounds recently. Indeed the unit has risen to buy $1.0153 midweek before it took a beating this morning as a result of its affininty with the greenback. The unit fell to $1.0091 after weakness in the U.S. initial claims reading. Finance Minister Jim Flaherty recently commented about the transition in the value of his nation’s currency to above parity with the U.S. dollar and calling this a “new world.” He said, “It would be unreasonable given those fundamentals for anyone in Canada to expect the Canadian dollar to go back to the days when the Canadian dollar was so significantly devalued vis-a-vis the U.S. dollar.”

Japanese yen – Weakness in the greenback spilled over in to its performance against the Japanese unit earlier with the yen strengthening at one point to ¥82.54. That move pierced Wednesday’s support for the dollar and could indicate a nearby slip for the dollar towards ¥82.00.

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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