Libya's unintended chokehold on the price of crude oil slipped somewhat late on Thursday allowing investors to breathe easier. Stock markets around the world have rebounded at the end of the week and demand for the safe haven units of the yen and Swiss franc have consequently subsided. The reprieve has allowed the dollar to raise its head leading some to question its absence during a period of intense risk aversion.
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U.S. Dollar – This week’s 14% jump in the price of crude oil has dulled demand for riskier propositions on the assumption that economic growth would suffer. One securities house estimates the impact of a sustained $10 per barrel increase in the cost of oil to be a 0.5% reduction in U.S. growth. The dollar’s use as a safety haven has played a lesser role this week. Any economic contraction would least favor the U.S. consumer and discourage the Fed from changing its policy mix. The outlook for growth will be highlighted by a U.S. GDP report for the fourth quarter where investors anticipate an annualized pace of growth of 3.3% and firmer by a shade over the three months ending in September. The dollar index is currently marginally ahead at the end of a week in which it declined by around 1.5% to both the Swiss franc and Japanese yen as better safety valves as risk aversion mounted.
British pound – A downwardly revised fourth quarter reading for Britain’s output crystallized the matters of importance for the national economy. The central bank has been hearing pressure-a-plenty from all quarters over the need to tighten monetary policy. This week’s MPC minutes revealed a third call for a rate rise from one of the Bank’s own members responding to a fourteenth consecutive monthly breach of the Bank’s 2% inflation target. The downgrade to growth in today’s revised report alleviated some of that pressure as investors pondered the importance of growth over inflation as the key catalyst. The pound reached its lowest in a month per euro and recently traded at 85.70 pence, while it dropped sharply against the dollar to a session low at $1.6069.
Japanese yen – The yen strengthened against the dollar after inflation reports showed less intensity surrounding the nation’s struggle with deflation. A nationwide January reading showed the annualized CPI rate at zero for a second month, while stripping out the impact of fresh food and energy prices saw prices fall marginally less than forecast at a pace of 0.6%. The Tokyo CPI gauge missed predictions in a good way. An initial dip in the January reading was revised higher albeit to an unchanged pace while the February report also saw prices decline by less than expected at a 0.1% pace. Excluding fresh food and energy prices fell at an annualized pace of 0.3%. The yen rose to a session peak at ¥81.62 before losing favor amongst investors as the region’s stock markets rebounded. With short covering lifting the dollar to a slim gain on the day, the yen has once again risen and last traded at ¥81.75.
Canadian dollar – The Canadian dollar broke new ground on a data-free Friday as investors continue to look at the elevated price of oil provides a tonic. The move seems at odds with the theory that rising oil prices will depress global growth and especially so given the nation’s reliance on the U.S. consumer, and perhaps the biggest casualty of Middle East unrest. The Canadian dollar might have found further wind beneath its wings as pre-market stock index futures staged a health rebound after two days of heavy selling. The Canadian unit rose to buy $1.0200 U.S. cents.
Aussie dollar – The Aussie rebounded in sympathy with its bedfellow commodity friend of the Canadian dollar and reached $1.0144 U.S. cents and still below a high at $1.0155 set a week ago. So the Aussie still has a little way to go even before it can challenge the record $1.0250 high set at the end of 2010. The rebound in the Aussie compares to a poor week for Asian dollars where an index shows they suffered their heaviest losses against the greenback since the first week in January. Investors are clearly trying to look beyond the rising oil price inspired by the Middle East unrest.
Euro – The single currency unit has given up a daily gain and appears to be gaining downside momentum heading into the U.S. GDP report. The euro had earlier traded at $1.3838, but following lackluster Eurozone money supply data along with a weak reading of French consumption, it has reached $1.3761 to stand at Thursday’s mid-point. January’s Eurozone-wide M3 reading of broad money showed a three-month average increase of 1.7% while the year-on-year pace of gain at 1.5% was lower than the December report. The readings possible indicate a slower pace of expansion ahead. A January gauge of French consumer spending decreased by 0.5% between months following a 0.4% pace of growth.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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