Foreign exchange traders had plenty to deal with after weekend turmoil in Egypt raised demand for safe haven units only for a return of inflation fears to quickly reassert its hallmark. At the same time the Irish central bank reminded euro bulls of the challenges of trying to run what’s emerged as a twin-speed economic area.
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U.S. Dollar – The dollar basket reversed fear-fuelled gains made heading into the weekend as investors tried to better gauge the consequences of an Egyptian uprising. Having reached 78.32 late in the week, the dollar’s index against six major trading partners slumped to 77.76 early on Monday. Equity markets in the U.S. fell sharply in response to news of growing tensions across Northern Africa leading world indices lower on Monday. Already, however, much of the fear premium priced into markets appears to be melting away as pre-market futures look beyond regional woes. Economic data is abundant this week and culminates with the January jobs report, which is likely to remain the key dollar driver throughout the next few days. The bias heading into the data is the Fed’s frontline argument, which remains that the economy is moving along but at a pace insufficient to create enough jobs. This is likely to hamper the dollar until of course jobs growth causes the Fed to shirk its frown.
Euro – The euro rebounded by more than a penny after a tense session to close out last week. On Monday there are two key factors at play outside of the Egyptian crisis. Data showed Eurozone CPI for January came in at a 2.4% yearly gain after prices rose by 2.2% in December. That pace is the highest since October 2008 and served to unleash further fears that the ECB won’t be able to sit still when they meet on Thursday for fear of a nasty incipient trend in inflation. Yet still, price pressures are largely driven by rising energy and food costs and likely to be transient in nature. But faced with the knowledge that the Fed is at worst sanguine over the same type of domestic price pressures while the ECB is mandated to control potentially hazardous price jolts, it’s the euro bulls that are winning the day. With little or no chance of a U.S. rate rise on the horizon dealers looking to Frankfurt are baying for blood. The euro rose to $1.3727 and to ¥112.55.
Japanese yen – The yen flipped and flopped overnight rallying as a safe haven candidate before slipping against the dollar, yet with equity futures near session highs ahead of a bullish opening for Wall Street, the yen has once again rallied against the greenback. The dollar currently buys ¥82.05. An earlier series of data was bullish for the economy with a Nomura/JMMA manufacturing PMI for January coming in at 51.4. In December the index of activity continued to depict contraction in the sector with a welcome reversal into expansionary territory to start the New Year. Industrial production for December was also strong with a 3.1% month-to-month gain higher than expected leaving output 4.6% stronger than at the end of 2009. Housing starts for December were also surprisingly strong showing a 7.5% year-on-year gain. Construction orders also surged by 13.1% despite expectations of a rather conservative gain of just 1.1%.
British pound – Recent MPC minutes revealed Martin Weale as the latest turncoat in calling for tighter monetary policy. Over the weekend the Bank outsider took pen to paper on behalf of the Guardian newspaper putting forth his argument in which he claimed there was a “powerful case” for a “modest rise” in interest rates in the United Kingdom. The article spurred further panicky gains for the pound against the dollar, which rose this morning to a session peak at $1.5929 as investors played out hopes that the Bank of England might attempt to put its credibility first and raise rates despite the expected tempering of economic activity in the coming quarters.
Aussie dollar – Just when Australians are getting to grips with a massive cleanup operation following devastating floods, weather forecasters are talking about a typhoon set to hit the nation later in the week. Predictions for 160 mph wind and as much as three-feet of rainfall are not what Australians want to hear. However, the Aussie has reversed earlier losses as the greenback gives up fighting equity market gains. Overnight the MSCI Asia Pacific index fell by 1.1% as investors drew in their horns. The Aussie currently buys 99.54 U.S. cents.
Canadian dollar – An escalation in Middle East tension and fears of a closure of the Suez canal rising, the price of crude oil just about recovered all of its losses from one week ago when Saudi Arabia hinted that it would lead an output boost to feed growing global demand. The Canadian dollar has emerged recently as the favored commodity dollar given the challenges facing the post-monetary tightening Australian economy. That fact is pretty evident on Monday as the loonie surges versus the U.S. dollar buying $1.0020.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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