It’s a mixed start for currency trading on Monday. The dollar continues to feel the afterglow of a positive response to Friday’s employment report, ambiguous or otherwise. The euro seems a little sloppy in the aftermath of a Brussels meeting of ministers at which Germany seemed to offend everyone with its vision of the euro of the future. Cohesive action has been pushed out for a further six weeks leaving the euro a touch lower.
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U.S. Dollar – The dollar stumbled out of the gate on Monday before reaching for the sky only to give back gains. After a lot of kicking and screaming the dollar is virtually unchanged against the majors, although on an index basis its basket is marginally higher at 78.14. The dollar seems underpinned by perceptions that its domestic economy is moving perhaps fast enough to ultimately please Mr. Bernanke. That would mean a possible shift in expectations surrounding monetary policy ahead.
Japanese yen – The Japanese unit has been less fortunate and as risk appetite grows around the world, more investors seem to be deploying carry trades with the yen as the unhappy short-side of the trade. Until recently the dollar too was feeling the same pressure and was even losing out to the yen as U.S. monetary policy appeared anchored to the ground. That perception seems to be shifting, albeit slowly, leading to dollar gains against the yen, where it started the week on positive form rising to ¥82.46. The yen managed to hold its own per euro and is static at ¥111.54.
Euro – One minister attending the weekend talks in Brussels called the meeting “surreal” on account of the opinions from the German contingent who wanted to impose lengthening the retirement age and standardizing it across Europe. Here’s where cultural boundaries start to get crossed. The Greek Prime Minister also said he didn’t see much chance of resolve to many matters underlying the successful boost to Europe’s stability fund ahead of the March 24 deadline. It would appear that investors might be at risk of having let their guard down prematurely surrounding the health of the euro given the level of discord across the region. In fact what changed after the Irish bailout was that contagion became a European issue rather than a government-specific one. The appearance of greater cohesion therefore bolstered the euro. In fact not a great deal appears to have changed. The euro earlier fell beneath Friday’s lowest point of last week to trade at $1.3534 following a disappointing reading for German factory orders for December. Growing sensitivity to the disunity among EU leaders has the propensity to weaken the euro this week.
British pound – The pound was boosted in early going following a newspaper article claiming that a shadow policy committee would lift interest rates immediately were it in power. The article crystallized the recent debate over whether the Bank of England will have its hand forced with an increasing number of onlookers clearly concerned by the threat from inflation. Indeed as the official monetary committee meets this week inflation is running at roughly twice the Bank’s 2% target level. And so the pound continues to rally unchecked by such rising expectations despite a warning from Governor King that the Bank’s view remains that such price pressures will ultimately pass through the economy. Later in the week the key for a successful strategy will be how effectively the committee manages to encapsulate both dissent among its members and communicate its stance effectively. The pound reversed those earlier gains before picking up again as the dollar withered. Against the greenback the pound buys $1.6135.
Canadian dollar – The Canadian dollar remains strong and buys $1.0125 U.S. cents despite an earlier setback versus the greenback. The labor data released in Ottawa on Friday was far less ambiguous than the report from Washington hours later and showed surprising job growth as employers added more workers. The unit remains underpinned by rising expectations that the Bank of Canada will resume its monetary tightening process during the second quarter of the year.
Aussie dollar – The Aussie has traded both sides of unchanged so far following a disappointing retail sales report and further evidence that the construction sector is lagging the performance of the broader economy. The unit rebounded from losses to $1.0111 U.S. cents in response to a December retail sales gain of 0.2% for the month, which was below forecast. The AiG performance of construction index continued to show contraction across building companies but at a faster rate the diffusion index, where readings above 50 signal expansion, came in at 40.2 after 43.8 in December. It’s likely that flooding impacted the performance of the sector. On a positive note an index of jobs advertised rose for the ninth straight month indicating a still healthy labor market. The Aussie last traded at $1.0153 cents.
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.