There’s a more somber mood brewing midweek with most of the ebullience felt at the start of the week wearing thin. Crude oil prices back at $105 per barrel remind investors that all is not well in North Africa or the increasingly unstable Middle East. The Bank of England warned that sharp increases in fuel costs might sour demand causing a further economic slowdown. News from Japan turned cautious as workers struggle to restore power to the crippled nuclear plants while possibly contaminated food was banned from Tokyo from several prefectures. The Japanese government also gave its first official assessment of the damage and warned that the nature of the disaster coupled with uncertainty of nationwide power restoration means that a sharp rebound in activity is unlikely. Risk appetite feels dull on Wednesday with a further drag on sentiment coming from the Eurozone where it appears political unrest in Portugal means that nation is on the verge of a request for a financial bailout.
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Japanese yen – A three-year old toddler could probably throw a ball further than the range exhibited by the yen in the aftermath of coordinated G7 intervention. If the Bank of Japan’s intention was to iron out excessive volatility of currency movements it probably deserves a five-star rating coupled with a commendation. I don’t remember the last time the yen traded for three days within a range of just ¥0.6, which is precisely what it has done since Monday. The dollar/yen rate has the capacity to trade that range in an hour and to see it incapacitated like this is painful for traders. The government said it may introduce a restructuring agency to coordinate efforts to rebuild the economy and said that the damage caused may reach ¥25 trillion ($309 billion). It also warned that a sharp rebound might not be on the agenda given the power outages likely to take time to repair. It estimates that the damage will reduce national gross domestic product by 0.5% in the fiscal year starting April 1. The yen held steady at ¥81.00 hugging the horizontal unchanged line as it has for three days. Against the euro the yen gained to ¥114.46.
British pound – Minutes from the Bank of England’s March meeting revealed a desire to “wait and see” how inflationary energy costs flow through the economy. Bank officials have adopted this attitude vocally recently claiming that there are copious amounts of spare capacity that would prevent price pressures from spiraling. With 330,000 public sector job cuts underway as part of a national austerity drive, the Bank has been cautious in its outlook for growth and correctly assumes that it wouldn’t take much to tip the economy back into recession at a time when the latest set of readings underwhelmed economists. The pound fell sharply against the dollar as bulls were greatly disappointed that the balance of power had not shifted despite a pick-up in inflationary pressures. The minutes revealed that the committee saw fewer risks in waiting to see how surging energy costs developed and added the new threat that a negative impact on demand and already hangdog consumer sentiment might trip growth up. Hardly rate-rising material. The pound slumped to $1.6250 from a 12-month high at $1.6400 on Tuesday. Against the euro the pound eased to 87 pence.
Euro – It’s beginning to look a lot like lawmakers will fail to agree on further measures to increase the lending limit of the financial stability fund by the weekend. The negotiations are likely to be dragged through to the early summer. An earlier agreement to boost the lending capacity from €200 to €500 billion might be enough to prevent a significant decline in the euro, but the reality of unresolved sovereign debt burdens is also likely to contain a major move higher in the meantime. The single currency has come off the boil again coinciding with the widely predicted demise of the Portuguese government whose opposition don’t want any part of the crippling austerity measures. Should a vote against occur today it would likely cause a national election. The country is one step closer to requesting a financial package from its regional partners and although the euro is slightly weaker in sympathy with this prospect, it is remarkably steady given the prospect of further sovereign debt torture for investors in coming weeks. The euro currently buys $1.4129 backing off gains more than a penny higher on Tuesday.
U.S. Dollar – With such a dull and largely negative flow of news the dollar index is magically higher on the day. The index measuring the greenback’s value against six major trading partners stands at 75.76 having retreated from its weakest level in 15 months earlier in the week. The resumption of dollar weakness earlier in the week comes as risk appetite returned and as investors breathed a collective sigh of relief that Japanese affairs were no worse than feared.
Aussie dollar – The tighter monetary stance adopted by the Peoples Bank of China as it attempts to squeeze inflation and cool growth has weighed somewhat on risk appetite in the Pacific region. The less positive news out of Japan in the last day caused investors to either take some profits after a spectacular Tokyo rebound or prepare for renewed selling in the days ahead. The cooler tone to risk spilled over into Asian stock prices and weakened demand for regional currencies. Investors were unprepared to drive the unit higher than Tuesday’s peak leaving the Aussie languishing at $1.0097. Thursday brings the semi-annual Financial Stability Review on which investors will draw on the authorities latest economic assumptions.
Canadian dollar – The loonster failed to recapture its pre-retail sales glory and continues to tread water this morning against the greenback. Today the local dollar buys $1.0183 U.S. cents and looks like it has the potential to at least $1.0150 should equity prices soften further than pre-market futures indicate. Currently the Canadian dollar doesn’t seem responsive to rising crude oil prices, which have broken $105 per barrel in early midweek trading.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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