It seems as though the investment community feels better about geopolitical and environmental risks at the outset of a new week possibly due to joint efforts on two fronts. Coordinated currency intervention has taken the undermined desire to drive a wedge between the value of the Japanese yen and prices of domestic stocks, which in turn threatened contagion around the world. Similar agreement by G7 nations to strike down the Libyan regime has been met with little but defiance from Tripoli. From the perspective of investors, a speedy conclusion to this affair represents a better outcome for global growth and is leading to a rebound in risk-on trades.
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U.S. Dollar – The greenback seems to have the yen and euro both in check this morning. The euro remains close to its highest since the start of December, while the guarded optimism coming out of Tokyo over the restoration of power to its damaged power plants is reason enough to tame demand for the yen. The dollar is not the big beneficiary of G7 intervention. That honor seems to go to the commodity-sensitive teams of Canada, Australia and even Britain. It’s a data-quiet start to the week globally with home sales both new and old on the agenda to kick things off. The dollar index is marginally lower at 75.89.
Japanese yen – Prime Minister Naoto Kan sees “light at the end of the tunnel” in the challenges facing the cooling of reactors at the Fukushima power plants. As the fears of a nuclear leak fall, so goes the value of the yen. Dealers who had earlier pushed the yen to a record high against the dollar have concluded that efforts by the G7 to stem its painful rise are a fait accompli and that the potential for profits is pitted against an equally painful downside. It doesn’t appear that there have been further yen sales at the start of the week and the dollar currently buys ¥81.23 from ¥80.79 heading into the weekend. While Tokyo was closed for a holiday, Asian stocks were higher in response to the news of relief as rescue efforts continue. The euro rose to buy ¥115.75 while the Aussie rose to buy ¥81.68.
Aussie dollar – As demand for the yen wanes risk appetite kicks back into gear. There still remains the prospect of a sizeable recovery package for Japan estimated to be around ¥10 trillion ($125 billion). Fears loom large that investors will repatriate overseas holdings of investment holdings to switch into bonds issued to fund the recovery. However, there is equally creeping suspicion that economic rejuvenation will ultimately weaken the yen and put the global recovery back on track. Asian stocks continued to rebound overnight helping boost the appeal of the Aussie dollar, which rose to $1.0069 U.S. cents in early North American trading. Appetite for the Aussie was boosted as dealers priced out the prospect of an imminent interest rate reduction that saw the chance of a monetary ease decline gains last week to one-in-three odds.
Euro – The euro continues to trade supported by the potential for a widening premium over the greenback but so far dealers are having a hard time boosting the single currency any further than Friday’s peak at $1.4192. Currently the unit is trading unchanged on the day just a shade below Friday’s peak. As risk aversion wanes, investors are thinking about the return to risk-on trades, which brings the potential monetary tightening promised by the ECB back into focus.
British pound – Rising risk appetite today favors the pound, which gained against the euro to 87.06 pence and against the dollar to $1.6287. The timing of its move matches gains for the Aussie and Canadian units, while dealers are also keeping one eye on the comments written by Bank of England Chief Economist Spencer Dale in today’s quarterly bulletin. According to the report the banking system made a solid start to 2011 as lenders stepped up the pace of debt issuance and made efforts to repay borrowings to the government having repaired their balance sheets. Mr. Dale observed that earlier damage caused by the recession and the stubborn lack of loan growth appears to have been well-countered by the Bank’s asset purchase program. We’ll soon learn whether Mr. Dale stood by his call for tighter monetary policy when the minutes from the March meeting are released.
Canadian dollar – The loonie benefitted after crude oil prices rose in response to the air strike by G7 nations on Libya over the weekend. The unit surged to a session peak of $1.0250 recently in New York as dealers look to the unit on prospects for a recovering risk appetite. As fears over the health of the Japanese economy lessen at the margin, the prospects for a commodity dollars gain.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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