Demand for safety once again fell by the wayside in the run-up to three key U.S. labor market reports sparking weakness in the yen and Swiss Franc while boosting the appeal of dollars sensitive to commodity demand. Investors continue to mull the comments of James Bullard who planted the seed that may yet grow to represent a reversal of the Fed's super-easy monetary stance. The Australian dollar is poised to extend gains for a third-straight quarter against both dollar and yen as investors look to rising demand for commodities as reason enough to lift it to an all-time high.
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U.S. Dollar – Evidence of an improving labor market this week may nourish that seed planted by Bullard, changing investors’ perceptions over his suggestion that it makes sense for the Fed to hold off buying $100 billion of its scheduled $600 billion in bonds by June. The ADP employment report kicked off events showing private employers added 201,000 jobs during March, with initial claims tomorrow and ahead of Friday’s critical March non-farm payroll report. Bullard takes the podium in London later on Wednesday. The dollar index remains in the black today and stands at 76.26 as the unit strengthens against typical safety harbors while it’s giving ground to riskier bets. Weakness in the housing markets remains a lingering concern with the latest weekly MBA mortgage applications data showing a 7.5% dip.
Euro – A series of confidence indicators appears to be reaching a peak across the Eurozone just in time for the ECB to consider as it strikes to prevent inflation taking hold. Consumer confidence remained at -10.6 during March after a protracted string of gains from deep in negative territory while economic confidence slipped by 0.6 to an index of 107.3 and missing forecasts. An index of confidence across the industrial sector remained unchanged while within services, optimism declined. ECB member Lorenzo Bini Smaghi noted that it was within the realms of possibility that sovereign debt problems could yet spread within the Eurozone. Portugal took an S&P downgrade on the chin intensifying speculation that bailout city is within walking distance and just around the corner. The euro felt the burden and remains lower against the dollar at $1.4100.
Japanese yen – More fervent yen fans jumped off the bandwagon as stocks rose dulling the appeal of its safety status forcing long investors to abandon a bullish stance. The euro and Aussie both rose to the highest against the yen since May as coordinated G7 intervention spearheaded by the Bank of Japan dissuaded those expecting to profit from the fear of yen strengthening from repeating the trade. The Japanese economy was already recovering in the last quarter according to a central bank Tankan report due later in the week and this should be evident in data for the quarter ending March. In signs of health ahead of the earthquake sentiment among small businesses was rising while the jobless rate last month fell to 4.6%. The desire to hold the yen on catastrophe grounds appears to be wearing this and this was priced in through a rising dollar overnight, which rose to ¥83.18 and beyond its highest since the tragedy.
British pound – Earlier gains to as high as $1.6083 for the British pound have worn off sufficiently to create a daily loss for the pound ahead of the New York opening. Retail sales rebounded in March according to a CBI survey, although the report was peppered with reservation about the outlook in the face of loss of consumer purchasing power and increased sales taxes. An index of services also rebounded strongly in January after the cold snap. Hotels and restaurants saw activity strengthen at the fastest pace in 11 months according to the report. In a separate note the statistics office forecast that last week’s budget would add 0.29% to the annual CPI rate over the next fiscal year starting April. The apparently healthier tone to today’s data again changed the attitude towards monetary change causing bullish dealers to drive up the value of the pound.
Aussie dollar – The Aussie rose to its highest since it was freely floated in 1983 on very little news. The recovery in Asian stocks and a weakening in the yen created better conditions for riskier trades and was accompanied by a lift in the Aussie to a session peak at $1.0333. Two minor labor market reports had little influence as investors focused on economic recovery outside of the nation. Skilled vacancies rose in March by 0.6% while overall vacancies in February declined by 1.7% after gaining 6.6%. The Aussie also rose against the Japanese unit to ¥85.60.
Canadian dollar – It seems that all systems are go for the Canadian dollar as the world is back in love with risk and commodity prices are reflecting rising optimism witnessed in global stock markets. Later this week we’ll learn whether the Canadian economy grew in January to match its fastest pace in 10 months. Rallying equity prices ahead of the official open played a role in driving the loonie to a session high at $1.0312 U.S. cents on Wednesday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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