The last time the euro traded above $1.4000 was November 8, 2010. ECB President Trichet lit the blue-touch paper and appears to have set the stage to fuel a rally back above there in the coming days and weeks as investors buy into the rising yield theory. His signal that the ECB must remain vigilant against inflationary pressures and his warning that it should be no surprise if the central bank lifts rates at its next meeting continues to create demand for the single currency ahead of a key U.S. employment report. On the other side of the report, which showed an additional 192,000 jobs were created in February, euro bulls failed at the finish line to trigger stops with the euro recoiling from a session high at $1.4001 to a fresh low at $1.3944.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc.
Euro – The euro has traded to as high as $1.3977 ahead of Friday’s U.S. non-farm payroll reading and has rallied close to its best level in a month against the pound and to a five-week high against the Aussie dollar. Investors will be listening for further clues in addresses from Trichet and Bini Smaghi on Friday. Mr. Trichet’s hawkish tone on Thursday caught money markets on the hope and sent yields sharply higher in anticipation of a far earlier official increase in short rates than any had dared predict. The step-up in rhetoric is seen in some quarters as a red-rag to lawmakers who have been dragging their feet in solving the lingering debt crisis and implementing tougher fiscal discipline on profligate nations.
U.S. Dollar – The approach of the labor market report is the only thing that had kept the euro beneath $1.4000 as investors brace for a big number. The problem is that a big number might not be enough to convince investors that the Fed might change its perspective on the economy. The dollar’s fate is sealed until the FOMC revises its take on the pace of healing in the labor market. Prior to today’s reading the dollar index was steady at 76.53. The recent dip in initial claims to the lowest in three years had primed expectations that the reading would snap back from weather-induced repression in January. Job creation was healthy across the board during February with employees at government agencies the only losers. Manufacturing and construction sectors added workers while private employment growth of 222,000 was beyond expectations. Because the report was not beyond overall expectations, investors initially tried to weaken the dollar, although that attempt has failed miserably.
British pound – The pound stretched one-third of a cent below and then above Thursday’s close at $1.6275 ahead of Friday’s crucial employment update in the U.S. It was driven to its session low following a further slide in home values as reported by the Halifax building society. Its February reading showed a decline of almost twice the predicted pace with prices falling by 0.9% between months. The three-month change versus a year ago was a dip of 2.8%. The report also predicted further 2011 slippage of 2%. On balance the report detracts from the need for tighter monetary policy, which is why the pound weakened. Beyond U.S. data the pound remains weaker at $1.6254.
Aussie dollar – The Aussie is feeling fairly much out of the limelight as the spotlight turns to the euro after Trichet expressed his intentions on Thursday. With no data to drive the unit overnight, the Aussie even failed to catch a ride on the coattails of surging stock markets, a symptom of rising demand for all things risky. The unit fell to $1.0118 ahead of the U.S. labor report and is set for a weekly loss. Late last year the RBA climbed on a fence to cast its gaze across the economy and ever since has been unable to climb down. At this week’s monetary policy meeting it suggested that policy was now on the mildly restrictive side. The Aussie later slipped post-employment data from the U.S to reach $1.0092 cents.
Japanese yen – Rising global equity prices are a sign that everything is bright and rosy in the investment community once again. Forget $102 per barrel crude oil and its impact on the economy, it simply goes with the territory and forget the Middle Eastern conflict. All is well, at least as far as the yen is concerned. It has lost out to the dollar overnight and looks set to lose ground on the week as it trades at ¥82.83 as risk aversion tapers off. The yen suffered further spiking lower to ¥83.07 for its weakest in 10 days.
Canadian dollar – This month the Canadians don’t get to steal the thunder ahead of the U.S. employment report. Typically both nations report on the same day, but this time around Ottawa is slacking and we’ll have to wait until next Friday to learn more on the process of recovery further North. The loonie weakened at the margin against a slightly firmer greenback ahead of the U.S. report and was trading earlier as low as $1.0256. The unit was stable following the employment report from the South today.
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.