Euro higher as risk rebound points to rising yields
The post-earthquake sigh of relief has allowed investors to reposition for a rebound in riskier assets helping put the focus once again on a round of rising interest rates. The dollar seems least likely to benefit in that role call and as such has weakened to its lowest in 15 months against a basket of currencies. Meanwhile the prospect of imminent tightening across the Eurozone and screaming genies of the British variety seemingly let loose from the inflation bottle make the continental pair the choice du jour among investors.
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U.S. Dollar – You have to look back on the charts to December 2009 to find the dollar index as weak as it is today. The ailing greenback has fallen to its weakest point in 15 months as investors rapidly conclude that a relatively nuclear-free disaster in Japan means that the global recovery will ultimately feel a boost from the need to rebuild a nation. Yesterday’s announcement from the U.S. Treasury that it is heading towards the exit in relation to its mortgage backed securities portfolio has not budged expectations regarding any shift in the fed funds rate at this point. Weakness in the dollar is largely confined for a second day to rampant commodity currencies and acceleration in the value of the British pound.
British pound – Inflationistas can be seen wagging their fingers at the Bank of England and saying, “we told you so!” after today’s rise in consumer prices to the headiest pace in 15 months. The February CPI index rose a greater than expected 0.7% bringing the year-over-year cost-of-living increase to 4.4% and rising beyond the Bank’s 2% ceiling also for 15 months. The pressure is rising on the remaining MPC members to capitulate and vote in favor of an inflation-fighting tightening in monetary policy. By most other measures the economy is likely to face severe growth challenges in the year ahead leaving Governor King faced with a very difficult balancing act in public. It seems that there is only so long he can keep blaming the erosion of living standards on tax measures and commodity prices. On his side, however, is the elixir of a rising pound, which today broke to its strongest against the dollar in 14 months to $1.6401 and going forward helps unwind some of the rising input costs paid by producers as commodity prices rise. Crucial to the whole debate is the peak for consumer price inflation. Governor King warned earlier of this hump. What’s unsettling money markets today is the fact that the pace grew by more than expected. On Wednesday we’ll learn more about the thinking of the MPC at its last meeting earlier in March when the minutes are released.
Euro – The euro rose against the dollar for the fourth day and now sits at around its highest since Nov. 5. As noted earlier the emphasis is clearly shifting back among investors to thoughts of imminent monetary tightening. Two governing council members yesterday expressed the need for the ECB to play out its vigilance through tighter monetary policy so that inflation doesn’t manifest itself. In response to questions at the Brussels EU parliament yesterday Governor Trichet said he had nothing to add to those remarks he made at the last ECB press conference at which he let the cat out of the bag on raising monetary policy. The coordinated G7 intervention aimed at stemming the rising yen from deepening disruptions facing Japan is also understood by the ECB. However, its recognition is unlikely to deter them from making the tougher choice of knocking monetary policy out of neutral. The euro today buys ¥115.28 and $1.4228.
Japanese yen – A 4%-plus surge in the Nikkei leaves the Japanese benchmark roughly 6% lower than before the forces of nature tore into the northern shores around Sendai. The nation faces a significant rebuild and more importantly it has the hurdle to jump of raising sufficient capital to back major infrastructure projects. The burden of rising debt may yet have the impact of weakening the Japanese yen into the second half of the year as it becomes costlier to attract inwards capital flows. The threat of intervention remains enough at present even after just an initial bout to keep the yen anchored to ¥81.00 per dollar.
Aussie dollar – Rising commodity prices overnight may have petered away in later European trading, but the risk-on mentality continues to foster recovery in the Aussie, which today rose to a near two-week high at $1.0152. Expectations over easier monetary policy have also continued to thaw in Australia. New Zealand recently lowered its benchmark rate in response to its second earthquake, while the Bank of Japan poured copious amounts of liquidity into the money markets to ensure financial systems didn’t buckle. And let’s not forget that the Australians were devastated by flooding followed by a cyclone. The impact on trade is still uncertain in coming months and it was hardly unreasonable to argue that the RBA might be forced into a policy response in the face of crisis. But as the shock value of the Japanese crisis wears off there is a slow move away from the thought process that monetary easing is close at hand. Bond yields continued to back away from crisis levels once again, further supporting the Aussie.
Canadian dollar – There’s possibly a little more than meets the eye to a dip in Canadian retail sales in February. Finance Minister Jim Flaherty’s concerns that excessive household borrowing could prove fatal caused him to implement restrictions in January to prevent overheating. At the same time a 1% increase in sales tax was implemented. The result seems to have been pretty immediate with sales flunking expectations for a rebound from a 0.2% dip at the start of the year coming in at -0.3%. Analysts had forecast a 1% gain. Excluding autos and parts sales in February stood still stoking fears that recovery might be challenged by growing restrain among consumers. Auto and gasoline sales fell while furniture buyers disappeared. The Canadian dollar bought $1.0240 ahead of the number but quickly fell to $1.0200 as fears that the rebound might be ending played out. Not helping matters is a dip in the price of crude oil, which is down 72 cents to $101.61.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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