The euro has now officially stepped back behind the starting line drawn at the time of last week’s ECB meeting when President Trichet fired the monetary tightening starting pistol. A ratings downgrade for Spain today reminded investors that there is much unsettled business in the region and that to buy the euro on expectations over widening yield differentials could easily turn out to be a shot in the foot. While the ECB’s preordained rate increase was at first seen by some as a green light for an excursion above $1.4000 others feel that the action of the central bank is likely to crystallize the political stalemate and hamper any advance in the euro.
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U.S. Dollar – The dollar index is up smartly overnight as a confluence of factors come together to drive it higher. Although crude oil futures continue to decline following a surge in oil stored at Cushing, Oklahoma reported on Wednesday, worries continue to mount that the elevated level of energy costs coupled with the deteriorating state of geopolitics in the Middle East will weaken global growth. The yen and Swiss franc both rose as risk aversion stepped up and as equity buyers stopped in their tracks. Global benchmarks are once again lower on Thursday and with the S&P 500 index fast-approaching recent support the, stage could be set for a negative break lower that could accelerate a more negative view on the outlook for growth. Later this morning analysts predict initial claims data through last weekend will continue to show steady improvement in the labor market with an expected reading of 376,000 claims for first time unemployment benefits. The dollar index is 0.5% firmer at 77.08.
Euro – Following its decision to downgrade Greek government debt a week ago, Moody’s served up a plate of the same to Madrid. Adding insult to injury the ratings agency also left its outlook on negative watch for the Iberian nation where unemployment stands at above 20%. The euro didn’t take today’s news well and fell to $1.3805 before it could manage any sort of a rebound. German trade data for January was significantly better than expected, although the report was overshadowed by worries over the health of the union ahead. Government ministers meet on Friday as they prepare to make solid and lasting plans to address the lingering sovereign debt crisis before a deadline just two weeks away. Naturally, the lengthening crisis and the discord among members is of concern to investors whose fear is that failure for anything less than lasting resolve will set the euro’s fortune’s back to square one.
British pound – The Monetary Policy Committee left policy unchanged at the March meeting today in line with expectations. Dealers had been hoping for the unexpected and that pound might rise on the shock value of capitulation by more members giving in to calls for an early interest rate rise. The pound rebounded from weakness associated with broader risk aversion as well as the impact on the euro caused by a Moody’s downgrade for Spanish debt. But it seems that once the Bank’s announcement was out of the way the last vestiges of bullishness disappeared with the pound sliding towards $1.6125. Against the euro the pound rose to 85.17 pence per euro.
Aussie dollar – The Aussie has been plagued by a series of negative events each threatening the growth trajectory and leading many to conclude that the RBA will be slower to make further monetary policy changes, if any at all. Today the scenario was worsened by the unexpected news of a trade deficit from China during February and a weak domestic employment report. Between them the reports have sent the Aussie lurching fast towards parity with the dollar and at its weakest moment earlier touched $1.0022 where it hasn’t traded since February 24. Chinese exports rose at a meager 2.4% pace while imports continued at a brisk 19.4% pace. The data was partly confused by the impact of New Year holidays around the region, but reality is that the Chinese may simply be balking on ever-higher costing raw materials. The net change in February employment in Australia was a drop of 20,000 jobs, which shocked those expecting that the rude health of the mineral-rich nation would boost jobs by 10,000. However, some of the sting was lost when analysts realized that within the data there was a firm switch between full-time and part-time positions. Nevertheless, the net change disappointed and a slight dip in the overall participation rate proved the point.
Japanese yen – The yen is losing out to a stronger dollar this morning as risk aversion flares. The dollar now buys the most yen since February 22 at ¥83.14. Part of the Japanese unit’s problem today was a larger fourth quarter contraction in GDP than forecast with the economy shrinking by an annualized 1.3% in the three months ending in December. However, the rationale behind the decline is easily explained by downward revisions to capital expenditure and consumer spending accounted for by changes to policy stimulus measures. Recent data has also firmed on both accounts and optimism over the outlook is firming.
Canadian dollar –The Canadian dollar pared midweek gains that drove it to a three-and-a-half-year high against the dollar as global growth concerns loomed large. The loonie slipped ahead of an international merchandise report to buy $1.0287 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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