Investors are seemingly immune whenever negative news appears showing their stronger will to drive risk forward than backwards. Hopes for a somewhat lasting resolution to the problem of how to cope with the Greek sovereign debt crisis continue to result in a painfully slow return of optimism for the euro given what the removal of this episode might achieve. Euro buyers seem desperate to carve words on the tombstone beyond the crisis with a bold invitation to the ECB to continue its path of tightening monetary policy.
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Euro – The euro came within a fraction of its strongest against the dollar in three weeks as buoyant spirits lifted the single currency against the backdrop of encouraging rumors that a deal for Greece was close at hand. The euro traded at $1.4447 before sellers turned the unit lower on the day. The major story doing the rounds involves incentives and concessions for existing Greek creditors should they agree to roll over bonds maturing in the two years through 2014. You can think of this as a stay of execution for the Greek authorities. The rumored incentives include preferential status for agreeable parties, higher coupon payments should they agree to roll bonds over and the payment of collateral as a token of good faith. However, an earlier report in Germany’s leading FAZ newspaper warned that the IMF might be forced to withhold its fifth tranche of Greek aid should its recent findings conclude that the forward 12 months’ worth of funding is not yet guaranteed. And with 10-year yields recently breaching pre-crisis levels it should be no surprise to learn that Athens is having a hard time borrowing from the European capital market. The euro seems to be buoyed from day-to-day by the pure hope that leaders can maintain a strong political will to put the crisis to bed. But in the meantime further evidence emerged of a slowdown in the Eurozone. May PMI manufacturing indices slipped in both Germany and France driving the Eurozone composite reading lower to 54.6 after 54.8 during April. The euro recently traded at $1.4399.
U.S. Dollar – The first of three key labor market measures is due Wednesday with the ADP employment change due to show little change in payroll growth during May. Initial claims on Thursday and the government’s employment report will be closely watched. A measure of the health of manufacturing across the world’s largest economy is likely to cool to its slowest pace in seven months when the ISM report is released later this morning. An industry report is also likely to show vehicle sales slowed somewhat during last month. The dollar index is a shade weaker midweek and trades at 74.53.
British pound – The pound weakened after the latest batch of data confirmed the ailing health of the domestic economy. Sterling eased to as low as $1.6395 against the dollar following a further dip to a below consensus 45,000 reading for mortgage approvals during April while consumer credit extended by the same in April as it did in March. It was also hard to tell whether there was any pulse left in the broad measure of money supply, which rose for a second month at a clip of just 0.1% meaning that M4 money contracted by 0.9% compared to one year ago. The clincher for the pound’s midweek performance was a faster drop in the PMI manufacturing reading for May, which came in at 52.1 after 54.4 in April. Against the euro the pound eased to 87.74 pence.
Aussie dollar – After two days of losses the Aussie rebounded sharply on relief that a first quarter growth contraction was no worse than estimated by the most bearish of forecasts. The Aussie unit surged towards its highest in three weeks and recently traded at $1.0745 U.S. cents. First quarter GDP shrank by 1.2% leaving annualized growth ahead by 1% after flooding caused mines to close and cyclones devastated farm crops. The unit also added about 0.5% against the Japanese yen to trade at ¥87.35. The nation’s manufacturing sector continued to contract during May, however. The AiG performance of manufacturing came in at 47.7 after reading 48.4 in April. With both key measures of Chinese manufacturing showing a further cooling in the pace of manufacturing expansion, it’s a surprise that the Aussie remains higher on the day at this point.
Canadian dollar – The local dollar strengthened all day yesterday after the Bank of Canada warned that at some point further action would be required to drain the economy of its current stimulus. Dealers took heed although the door remains wide open as to when the Bank might shift rates again. The unit rose to $1.0331 U.S. cents in early New York trading.
Japanese yen – After touching ¥81.77 on Tuesday the yen rebounded against the dollar midweek to trade as low as ¥81.15. May vehicle sales stood 37% lower than at the same time one year ago.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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