Euro facing Eurozone debt-reduction agreements

A resurgence of pessimism over prospects for debt-reduction agreements has sent the euro to its weakest in three years and ahead of two-day talks between Eurozone finance officials. The euro is sharply lower following the weekend sparked by a whole new wave of discontent from several members who see things differently from their partners. The reaction has reversed risk sentiment sharply in the opposite direction causing several currencies to quickly retrace their tracks.

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U.S. Dollar – Dealers were wrong-footed on Friday as they prepared for a weekend of potential turmoil in Egypt by loading up on the greenback. As bigger-than-ever crowds headed in to Cairo, news that the Egyptian President had thrown in the towel within hours of telling his nation he’d remain in power until September, caught dollar bulls on the rope. However, the greenback is once again on the rise to start a new week and has already taken out Friday’s high for the dollar index, which is this morning trading at 78.76 for its best reading since January 21. With no data on the agenda in many nations to kick-off trading this week and with little emphasis on risk aversion as far as equity prices seem to be concerned, the driving force appears to be liquidity preference, playing right into the hands of the dollar. Its index against a basket of world currencies is 0.5% higher so far on Monday.

Japanese yen – The yen strengthened overnight in response to a slightly better fourth quarter GDP report. It had been well-flagged that a drag from exporters struggling to deal with a rampant yen along with an end to government incentives and subsidies would cause a contraction of growth to end 2010. In the event, the economy shrank by 0.3% in the three months to December, which on an annualized basis works out to be a 1.1% contraction undermining more bearish predictions of 2%. Looking ahead the economy is expected to revive by 0.9% in the current quarter and is anticipated to fare even better towards the end of 2011. Underpinning optimism is growth with emerging Asian nations, which will help fuel Japan’s export growth in the months ahead. The yen leapt on the news that the economy didn’t contract as much as anticipated and reached ¥83.09. However, growing concerns within the Eurozone today have fuelled a preference for dollars causing it to rebound to ¥83.50 against the Japanese unit.

Euro – There’s quite a mix of negative news surrounding a two-day Brussels meeting of finance chiefs starting Monday. With an Irish General Election just 11 days away, the opposition leader said that if it wins power it wants to sit down with EU and IMF officials to renegotiate terms of the nation’s bailout terms. The leader of the main opposition party Fine Gael said that senior bondholders should share the cost of the national banking crisis. Meanwhile a Greek government spokesman warned that measures imposed upon his nation by the EU and IMF mandating the disposal of state assets over a five-year period aimed at raising €50 billion were unreasonable. Along with Italy, the Greeks have also voiced irritation with plans to impose annual debt-reduction targets. Such a plan would railroad Greece into restructuring its debt as annual interest rate burdens get slowly worse. Many observers have expressed surprise at the euro’s recent rebound coincident with the rapid disappearance of the Eurozone’s many problems and said it was unlikely to last. Today that observation appears to be coming true with the euro pretty much in freefall to start the week, reaching a low at $1.3431. Adding to the discord this morning, Reuters news also reported that the plight of state-owned German bank WestLB is in flux. Earlier it received a rescue during the financial crisis.

British pound – The pound made the most of a crippled single European unit this morning and rose by 0.8% as the euro fell to buy 84.02 pence. Investors continue to rally around the pound in hopes that the central bank will be forced into raising interest rates to break the back of stubborn inflationary pressures. Later in the week the Bank of England unveils its latest projections for growth and inflation. The pound eased against the dollar coming off an earlier high at $1.6076 to stand at $1.5989 in early New York trading.

Aussie dollar – The Aussie jumped by a half-cent to start trading on Monday gaining to $1.0075 against the U.S. dollar. The Aussie rose on two counts. First, Asian stocks were in good form with Shanghai equities adding more than 2% and Tokyo stocks up more than 1%. Second, a report showed home loans in December jumped by twice as much as expected with a 2.1% gain keeping pace with a 2.5% pace of increase in November. Banks also bolstered investment lending by 3% at the same time after a 2% decline the month before. The Aussie nevertheless ran into trouble on account of the trouble brewing for the euro and as liquidity preference favored the U.S. dollar. In early New York trading the greenback had eradicated all of the Aussie’s gains sinking it to $1.0009 U.S. cents.

Canadian dollar – The Canadian unit rose on Friday to $1.0150 as news of the Egyptian deadlock broke. This morning the picture is little changed with crude oil trading both sides of unchanged remaining influential in the fortunes of the loonie. The Canadian dollar eased a little following Friday’s oversized movement and currently buys $1.0115 U.S. 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.

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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