Greek default a cloud over the euro

IB FX Brief: Pound lifted by in-line growth data

The necessary evil of a Greek default continues to hang overhead like the Sword of Damocles with some wishing for its fall given the prospect of its removal seems less likely. This year’s Sherlock Holmes award goes to EU Monetary Commissioner Olli Rehn who earlier told an OECD forum in Paris that Greece is “the most difficult case” among the three bailout victors. Yesterday’s commodity rebound has paled into insignificance as investors balk at the prospects for growth should the authorities lose its grip on the Sword.

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British pound – Dealers have been accustomed during 2011 to spikes in the British pound following positive data especially when upbeat numbers seem capable of sparking a flame of dissent at the MPC that would fan the flames of an initial monetary tightening. Yet it’s surprising that investors rallied around the pound following the release of an in-line first quarter GDP report that left much to be desired. Moreover, the OECD today revised lower its growth assessment for the British economy for 2010 to 1.4% from 1.5% and by two-tenths to 1.8% for 2012. The body warned the Bank of England to maintain stimulus at a time when the economy is enduring severe fiscal tightening. There is little within the first quarter report that makes me think that either the Bank is closer to pulling the monetary trigger or that the economy is better today than it was yesterday. It’s no surprise that exports jumped by 3.7% given the reliance on strengthening external demand. And while such reliance will be less assured in the coming quarter, more worrisome is the fact that imports shrank by 2.3%. Gross capital fixed formation hit the rocks as companies invested less and slid by 4.4%. Government spending rose by a far greater 1% and more than made up for an unexpected slump in private consumption of 0.6%. The pound’s surge to $1.6241 is baffling and will have to go down as another one of those occasions good for sellers! The pound rose per euro to 86.63 pence.

Euro – In late Tuesday trading the euro rallied above $1.4100 as risk-on bets forced dollar sellers as sentiment towards commodities was buoyed. However, like a recurring nightmare, dealers awoke to the omnipresent vision of a sovereign debt default. Still Olli Rehn dared to inspire innovation as he told a forum in Paris that perhaps private agreements between Greece and bondholders could allow the cash-strapped nation to extend specific repayment maturities. And I think we all know what the folks at the ECB might have to say about that! The German GfK consumer confidence reading for June came out Wednesday and dipped for a third consecutive month to 5.5 after 5.7 reported in May. The euro felt the full weight of investors’ fears and made a beeline for the nearest big-figure dropping to a session low at $1.4013. At least it’s beginning to look as though this region might just be forming a base for the single currency, but on the other hand the lack of any prospect for resolving the sovereign debt issue is likely to keep the euro under severe near-term pressure. The unit last traded at $1.4075.

U.S. Dollar – Durable goods orders or April are predicted to have fallen by 2.5% on the month following a gain of 4.1% in a report due later today. Ahead of the report the dollar index remains buoyed by investors agitated by the longevity of the sovereign debt crisis and adding weight to the dollar’s current form is the recent reduction in inflation expectations, which have vindicated the stance of the Federal Reserve and pulled the rug from beneath expectations that other central banks will lift monetary policy thus lifting the appeal of their own currencies. The dollar index remains higher at 76.00.

Canadian dollar – Interest rate expectations continue to soften in Canada and have added a downward bias to the local dollar. In early going midweek going the Canadian unit slid to its weakest price versus the dollar since March 28 and traded to as low as $1.0184 U.S. cents. Dealers must be wondering whether the reduced inflationary expectations cutting short the prospect of further monetary tightening in Canada will urge an attempt at parity between the pair. The Canadian unit hasn’t been that weak since February 1 and since that date has recorded a peak at $1.0550 cents. The economic calendar is clear north of the border on Wednesday.

Aussie dollar – Also suffering at the hands of background worries over sovereign debt is the Aussie dollar, which also slipped up as regional stock indices failed to find traction from Tuesday’s commodity-inspired action. Investors continue to chip away at the monetary tightening policy argument for the Aussie, and while it has a nice cushion with a short-rate at 4.75%, this is a prerequisite for a high-yielder. As arguments run-thin at the RBA and as clouds gather over global growth prospects commodity-sensitive units suddenly need more than just prerequisites to keep the momentum alive. Today the Aussie slid to its weakest versus the dollar in almost six weeks falling to $1.0441 U.S. cents. Selling picked up after a government report for construction completions in the three-months to March gained at just half of the anticipated 1.4% pace.

Japanese yen –Japanese export data for April disappointed and fell by 12.5% compared to a year earlier while imports rose by 8.9%. The traditional safe haven continues to underperform its bed mate with the dollar rising to ¥82.12 on Wednesday, while the yen weakened against the euro to stand at ¥115.63 in early New York trading.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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