Currency trading got off to a curious start on Monday with dealers apparently reluctant to be the first to lean further on a depressed dollar for fear of a snapback. And while there is no let-up in terms of appetite for risk, at least not yet indicated by pre-market equity index futures, investors seem more inclined to take profits on a variety of units rather than keep on pushing at new peaks. U.S. political leaders took negotiations down to the wire over the weekend averting a government shutdown with just two hours to spare. The dollar is higher as the world’s biggest government remains open for business as usual.
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U.S. Dollar – The fact that the U.S. political forces managed to avert a show-stopping government shutdown over the weekend added some support to the dollar to commence the new week. However, the dollar simply strolled into the weekend and there was little obvious fear displayed by investors. It’s a data-free day in the U.S. and in most major markets with fresh new impetus to shape trading. The dollar broke its early November low as most investors recognized that the Fed will likely remain anchored throughout the remainder of 2011 at the same time that the risk to policy moves around the world is greater. The dollar index is in the black by a whisker on Monday at 74.99.
Canadian dollar – Pressure pockets have been building across several currencies in terms of expectations for monetary policy. It’s a hot topic in light of last week’s change of mood from the European central bank and to an extent reminds investors that growth has resumed and with it comes inflationary pressure. The surge in commodity prices underpins the Canadian unit and has driven the unit to a four-year high against the greenback. The Bank of Canada meets on Tuesday to discuss the latest series of economic releases and has to reconcile a current 1% benchmark rate of interest along with a deteriorating take on inflation. In a recent survey taken by the central bank, more executives expected inflation above a 3% pace and so well above the Bank of Canada’s 2% ceiling. In last week’s jobs report for March, although the net change was a marginal loss, there’s no escaping the strong 90,000 creation of full-time jobs. There remains only a slim chance of a change from the Bank on Tuesday although investors seem to feel that it remains a matter of time before rates edge higher. To start the week the unit has slipped against the dollar to $1.0433 U.S. cents.
Aussie dollar – The Aussie has also lost its momentum in early New York trading and is now lower against the greenback at $1.0550 U.S. cents. The Aussie nevertheless has taken full advantage of a sharp recovery in sentiment towards Japan coupled with a third straight weekly gain for prices of raw materials. The Reuters/ Jefferies CRB index rallied again last week as gold and silver prices reached new ground for this move and energy prices continued to attract speculative forces. The Aussie also reached a 31-month peak against the Japanese unit.
Japanese yen – Despite early morning weakness in Tokyo the yen has found its feet following a 7.1-magnitude earthquake that shook the nation. Investors clearly are having a hard time letting go of the unit as a safe haven when negative events hit the dealing screens. The dollar today buys ¥84.68 having earlier recorded a gain to ¥85.16.
Euro – There appears to be a growing chorus of negative voices in the aftermath of the ECB’s quarter-point increase in interest rates last week. At the weekend billionaire investor George Soros judged the move to be ill-timed in light of the Portuguese government’s request for financial aid. The debt-laden nature of peripheral countries is proving that the central bank’s one-size-fits-all approach to monetary policy is too tight around the fingers for those nations having to roll over maturing bonds in the European debt market. Yield-happy buyers drove the single currency up to within 12 basis points of $1.4500 to close last week, but on reflection investors are turning less enthusiastic given the health of the economy at Europe’s edge in light of a tighter monetary stance. The euro traded lower to stand at $1.4438 by lunchtime in London.
British pound – MPC member Andrew Sentance told Britain’s Sky News at the weekend that he continued to vote for an interest rate increase at the April policy meeting that would double the cost of borrowing. Mr. Sentance says that he wants to assure that the central bank doesn’t lose control of inflationary pressures, noting that public opinion had slowly shifted towards expecting a gradual increase in interest rates as prices gained upside momentum. On Tuesday the government will release consumer price data for March and is expected to report a 4.4% gain to match the February reading. The pound continues to trend lower to start the week although is off a session low at $1.6314.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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