The dollar cemented gains immediately after the March employment report yet the picture was already clear as investors spent the first day of the second quarter piling into riskier assets. Most notable is the dramatic weakening of the Japanese yen as evidence mounts that the nation is likely to be left behind in the growth stakes heading into a massive reconstruction effort. Its domestic monetary policy is therefore destined to remain moribund for the longest period of time while efforts to resume business as normal in light of rising commodity prices is spurring certain central banks in to a higher gear.
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Japanese yen – The start of April marked the release of the Bank of Japan’s quarterly Tankan survey, which measures the optimism among large corporations. The marginally more optimistic response (+6) from large manufacturers came ahead of the March 11 earthquake and improved on a +% reading at the end of 2010. A reading of zero indicates an equal number of pessimists against optimists. The reading of +3 for the non-manufacturing sector was also above what had been mapped out by forecasters and builds on +1 last time round. The yen weakened against all majors as risk appetite grew across the globe with the Bank of Japan looking the least likely to normalize policy in light of the recent damage to its economy. The dollar surged to ¥83.73 and unbelievably continues its best run against the yen in six years. The yen’s 2.4% first quarter decline against the dollar is the biggest since the end of 2009. The dollar surpassed ¥84.25 after the U.S. labor market created an additional 216,000 jobs during March.
Euro – The euro appears to be having a soft close to the week after investors piled in ahead of next week’s de facto interest rate rise from the ECB. The prospect of a widening yield differential has boosted the appeal to the single currency despite the backdrop of simmering sovereign debt turmoil. The ECB is trying to stick to its anti-inflationary hard line while trying to provide abundant liquidity to partially crippled bankers at the zone’s periphery. The euro slipped to a session low ahead of the U.S. labor data to trade at $1.4146 and after a continuation of the theme that the Eurozone is cooling at the edges. The March manufacturing PMI reading softened to 57.5 from 57.7 disappointing investors. While that’s not enough to stop the central bank in its tracks at next Thursday’s meeting it is enough to make investors wonder how many more times the ECB will be prepared to hike rates when faced with an economy that’s past its peak of expansion. After U.S. data the dollar stole further ground against the single currency to $1.4113.
U.S. Dollar – The greenback was in decent form as risk appetite underpinned asset classes around the world. Until James Bullard spoke earlier in the week the risk-on approach undermined the dollar, but the seed he has planted in investors’ minds about cutting short of FOMC’s plans to see through the entire second phase of easing has changed all that. Yesterday Jeff Lacker of the Richmond Fed reiterated Mr. Bullard’s perspective. Later today we will hear from Fed colleagues Dudley, Plosser and Fisher. In the event the U.S. labor market turned in an encouraging performance with private payrolls posting a 230,000 gain. The dollar index rose to 76.28 marking a 0.4% session gain.
British pound – The British pound traded both sides of unchanged before U.S. data and an earlier positive tone for broader risk appetite was spoiled following a lackluster PMI manufacturing report for March. Not only was the February reading revised lower to 60.9 but the current reading fell more than forecast to 57.1 causing investors to take a dim view of the health of the economy ahead. The report provides a black eye to the hawks on the MPC given what is expected in coming months for the British economy. The pound traded at $1.6038 for a mild gain before the labor data from the U.S. but still about half a cent of its session best. After today’s report the pound was on its session low and down on the day testing $.6000.
Aussie dollar – The Aussie rose to a an 11 month high versus the Japanese unit after investors were encouraged over global growth prospects by a rise in the performance of Chinese manufacturers. The official manufacturing PMI from Beijing turned higher for the first month in four and improved to 53.4 from 52.2. The HSBC version of events nudged marginally higher but tracked the same uptick in activity. Against the greenback the Aussie failed to further penetrate this week’s record peak and traded at $1.0358 before the labor data.
Canadian dollar – The risk-on campaign drove the Canadian unit to fresh highs against the greenback in early morning trade with the unit reaching a pre-data peak at $1.0340 U.S. cents. A healthier outlook confirmed in today’s U.S. labor report sparked a further wave of buying for the loonie.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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