One month ago ECB Governor Trichet remarked that it should be no surprise to see his central bank vote through an increase in the main refinancing rate at the April meeting. The single currency has cemented gains above $1.4000 since then on prospects for a widening yield differential to establish itself. Only now investors are demonstrating some regret that the central bank will don its one-size-fits-all policy as it pulls away from a record low era for monetary policy. Yet the softer recovery at the edges creates nervousness over the ailing health of its peripheral members and is now weighing on the shared currency even ahead of Thursday’s meeting.
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Euro – A quarter-point increase in its main cost of borrowing is a done deal even ahead of the ECB’s April meeting. The clues from the inflation-fighting central bank have been too blatant to arrive at any other conclusion. Indeed the euro just completed its best performance against the dollar since the currency was first adopted in 1999 and rose by 3.6%. However, on Monday the euro softened against the dollar over concerns that despite a pick-up in growth for core manufacturing nations, a monetary tightening will prove too onerous for its second-tier members. The single currency earlier hit $1.4269 before paring gains and heading south to an intraday low at $1.4192. The brisk start saw the unit gain after a February producer price report highlighted a pick-up in the pace of input costs to a 6.6% pace compared with one year ago. But in keeping with other recent signs that activity might be fraying at the edges, a Sentix investor confidence report for April slipped to 14.2 coming off its highest reading last month at 17.1 since September 2007. Without doubt the heart of the Eurozone has recovered strongly amid an era of record low monetary settings but we trust that the inflation-fighting instincts of the ECB turn out to be a better-judge than 2009 when they last adjusted policy upwards in response to price pressures. The result then was a swift reversal within three months.
Japanese yen – Professor at Aoyama Gakuin University Eisuke Sakakibara, better known as Mr. Yen, delivered comments on his favorite topic earlier that may yet appear on economics undergraduates’ final exam papers. “This atomic energy issue is an incident which would probably force money to leave Japan,” said Mr. Yen predicting that the yen would likely weaken per dollar to back above ¥90.00. The exam paper might show a chart of the yen reaching a record high against the dollar one week after the earthquake and ask students simply to “discuss the performance of the yen in light of Mr. Sakakibara’s insight.” Despite today’s comments the yen reversed earlier weakness per dollar and rose to ¥83.95. It also made gains per euro to ¥119.53.
U.S. Dollar – The dollar had a huge day on Friday influenced by a stronger than forecast employment report only to be beaten back by comments from a Fed official who said that the recent recovery was no reason for the FOMC to back away from its current course. The performance was mirrored on Monday with the greenback first gaining and then moving lower ahead of a data-free day. The dollar index currently stands at 75.78.
British pound – The better appetite for risk has helped the British pound recover recently. Much of the latest data has supported the view that the majority vote at the Bank of England is right to hold off from shifting to a tighter monetary stance simply because tax increases and rising energy costs have left the Bank of England dancing with inflation. The pound rose to $1.6175 following a March PMI construction report that remained close to an eight-month high leaving the index in expansion mode for a third month. The data also helped the pound claw back against the euro towards 88.00 pence.
Aussie dollar – The Aussie recoiled against the greenback but not ahead of a fresh record high at $1.0417. Gains were unsustainable, however, and the unit slid to $1.0362. The Reserve Bank meets on Tuesday but is widely expected to leave its policy setting alone at 4.75%. A measure of health for the labor market improved for an eleventh month with the ANZ job advertisements index expanding by 1.3% during March. A March reading for inflation from TD Securities showed the pace of inflation expanded at a year-on-year pace of 3.8% and above the central bank’s 2-3% range.
Canadian dollar – With commodity prices reaching somewhere near the stratosphere attaining a two-year high, the Canadian dollar continues to attract attention. It remains lower today despite the fact that crude oil futures are trading above $108 per barrel. The unit has surrendered an earlier gain to the dollar and has subsequently slipped to $1.0350.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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