On any other day the euro might have surged following a duet of warnings from ECB officials that policy is too loose and the path ahead will live up to investors' expectations of further yield-pumping rate increases. But the customary din of the plate-smashing in troubled Greece got louder over the weekend with a super-lob coming from Northern Europe as the Finns joined the party. Investors pummeled the euro in conclusion that tighter monetary policy and the changing attitude of European voters is hardly a good mix.
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Euro – A rather large dinner plate came crashing right through the restaurant window grabbing the attention of everyone else throwing cups and saucers into the fireplace. Elections in Finland over the weekend saw a sharp jump in support for the anti-European True Finns party who landed 19% of the vote compared to the pro-European National Coalition who took 20.4%. The message of the leader of the True Finns movement already warned that his party wouldn’t have used domestic taxpayers’ funds during the rescue of either Greece or Ireland. Heavy selling of the single currency drove its value down to $1.4267 on Monday from $1.4430 at last week’s close. Perhaps it’s the dawning realization among investors as they see the changing face of Europe’s voters that is reversing the appeal of the currency. As opposition grows across the Eurozone to using taxpayers’ money to clean up the self-inflicted mess around the periphery, the prospect of rising interest rates also loses its appeal. In recent days several ECB members have warned that inflation is prompting them to keep up with raising interest rates. Austria’s Nowotny said that market suspicion of a further half-point increase in monetary policy during 2011 was “well-founded.” Belgian Luc Coene noted that monetary “conditions were too accommodative.” President Trichet noted that the region’s economy could withstand a policy reversal having gathered sufficiently self-sustaining momentum post crisis. On any other day these comments could have sparked a new 52-week high for the single currency, but not in the face of today’s political drama playing out on the continent.
U.S. Dollar – With the euro under political pressure, global equity benchmarks are sharply lower and risk aversion is the order of the day. The dollar index has rallied sharply and stands 0.6% higher at 73.35. Recently the dollar has languished at times of market stress and left the running to the yen and Swiss franc. Increasingly, the more popular safe harbor has been the euro, but in light of rising political tensions and uncertainty over Greece, it’s the dollar that today has regained its crown, for now at least. There is a scant data due out ahead of the Easter break including an expected dip in the reading of the April Philadelphia Fed index of regional activity.
Japanese yen – The yen resumed its uptick as pressure mounted on the euro-area. The Japanese unit jumped to ¥118.48 for a 1.5% session gain while it also rose by 0.3% against the dollar to ¥82.90. The news from Tokyo over the progress being made post-disaster is not only thin but also taking second-billing to events unfolding in Europe.
Aussie dollar – Stocks fell in Australia and the fear that Greece may need to restructure despite its leaders repeatedly denying that it would need to is taking the shine off the high-yield argument to start the week. The Aussie gave ground to the yen where it buys ¥87.25 and against the dollar where it buys $1.0520 U.S. cents.
Canadian dollar – The Canadian unit slid to $1.0350 U.S. cents at the outset of North American trading on Monday as growth fears spilled out of a worsening European situation. Again the local economic diary is relatively bare ahead of the long weekend and it appears that some position squaring could be in order with profit-taking perhaps extending any moves.
British pound – The British pound also eased against the greenback after an Ernst and Young Item Club report in which domestic growth was revised lower. The consultant shaved a half-point off its 2011 GDP projection to 1.8% hinting that there was little pressure on the Bank of England to restrict policy in light of the weight of fiscal adjustment put into place to restore order to the budget deficit. The pound eased to $1.6258 while advancing per euro to 87.82 pence.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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