The euro eased back from an eight-week high propelled by bearish investors closing out huge short bets against a systemic breakdown across the Eurozone. Over the weekend the Irish Prime Minister announced he’d soon throw in the towel amid deepening unpopularity across the nation leaving the fate of the budget in jeopardy. Last year’s €85 billion promise of financial assistance to Ireland from fellow members requires the safe passage as a prequalification of aid. Elsewhere the underlying theme of global recovery continues to dominate the fate of the dollar and yen.
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U.S. Dollar – Dealers bought the dollar on Monday ahead of key data reports due later in the week likely to show signs of further economic growth and rising confidence amongst consumers. The dollar index is currently off its best levels of the day but is higher by 0.2% at 78.27. It’s a busy data-week for the U.S. with the FOMC meeting but unlikely to alter monetary or its quantitative policy. President Obama delivers his State of the Union address on Tuesday and will emphasis the need to accentuate the competitiveness of the U.S. position and will also develop the plan to reduce unemployment and cut the escalating government deficit.
Euro – Over the last two or three weeks speculators have scaled back massive bets against the fortunes of the euro in the currency futures market. Latest open interest data shows that a net short position of some 111,000 contracts has been eliminated now leaving the market marginally long. Such a move in the face of growing confidence that the euro is unlikely to shatter amidst strengthening resolve to shore up regional finances has created a groundswell of pessimism amongst those most bearish on the euro resulting in a six-cent upswing in its fortunes in just three weeks. The euro reached its highest since November 22 as the bears licked their wounds and today buys $1.3598. A PMI composite survey for January improved to 56.3 from 55.5 although within the data the manufacturing index lost its momentum and pulled back. An index of service sector performance did continue to expand. Region-wide data mirrored the performance of Germany, the largest economy in the Eurozone.
Aussie dollar – Overnight losses for the Aussie have subsequently reversed in early North American trading with the unit surging to 99.20 U.S. cents and well off a session low at 98.64 cents. Treasurer Wayne Swan noted over the weekend the “enormous” economic impact from the flooding that hit the Queensland territories. The flooding puts any central bank ambitions to raise monetary policy on hold and as such reduces the appeal of the Aussie dollar. Data released overnight shows prices paid to producers in December rose at the lowest rate in 12 months for a 0.1% gain compared to a forecast reading of 0.5%.
Canadian dollar – As with the Aussie the Canadian dollar is fighting back against an earlier bout of U.S. dollar strength that saw the Canadian unit slip to $1.0018. It has subsequently recovered to stand at $1.0055.
Japanese yen – As regional stocks broadly rise, the Japanese yen lost a few fans with demand for riskier asset classes on the rise. The yen weakened after the release of a position paper from the government in which it explained again its vigilance against a rising currency. The paper noted that the government would continue to act if necessary against unwarranted currency strength, which it said causes economic strain and financial market stress if left unchecked. The government remains prepared to “take bold action when necessary” according to the report. The yen eased per dollar to stand at ¥82.75.
British pound – The British pound is weaker ahead of a report scheduled for later in the week likely to show the economy lost some of its recent momentum in the fourth quarter. The pound looks to be challenged by the height of the hurdle at $1.6000 against the dollar where it has recently tested reaching lower peaks on subsequent occasions. The pound also lost ground per euro, which today buys 85.30 pence.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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