Moody’s latest ratings downgrade for Greece brings the nation’s credit-worthiness to the same level as Cuba and puts default as likely as the outcome of a coin toss. For an advanced European nation whose mainland peninsular is brimming with BMWs, that’s quite some feat and one worthy of a fine Havana cigar. Quite how the mandarins in Brussels failed to see through the nation’s books at the outset – well that’s another story. Today German Chancellor Merkel speaking in Singapore reaffirmed her nation’s commitment to the single currency and pointed to the nature of the debt crisis as opposed to a euro crisis, even claiming that sometimes the single currency is so strong that it shrouds Germany’s export prowess.
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Euro – The euro found the wind beneath its wings following Merkel’s observations and was lifted after ECB President Trichet suggested a Eurozone finance ministry to take a tougher stance on bailout nations who struggle to implement remedial fiscal measures. Under those circumstances, suggests Trichet, intervention by a regional finance ministry would provide “a much deeper and authoritative say in the formation of the county’s economic policies.” It seems that investors have found solace in the words of European leaders late in the week. The euro advance to a three-week high buying $1.4486 at best on Thursday. Ms. Merkel earlier stated, “The economic and monetary union has to be a community of joint responsibility. It is our joint interest to tackle the structural weaknesses of individual countries forcefully and effectively.”
U.S. Dollar – The fact that investors are warming to the prospects of a deal for Greece that is likely to see it fall into legitimized default, has detracted from the safe haven flavor of the dollar. There is a reasonably strong likelihood that should Friday’s employment report confirm labor market weakness, global interest rate expectations will continue to be pared, which would work in favor of the dollar. In a speech delivered in Tokyo, Fed Vice Chairman Janet Yellen said that, “the current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.” However, as the drama surrounding Greece subsides investors are warming to the appeal of the euro in hopes that the ECB will soon be able to kick the machine back in to rate rising gear. The dollar index is weaker by 0.7% at its lowest in four weeks ahead of initial claims data and an April reading of factory orders.
British pound – The pound was lower earlier but has been dragged higher by the collar as sentiment towards the euro rebounds. PMI construction data showed that commercial and residential building activity revived during May while civil engineering projects began to suffer at the hand of deep government spending cuts. Bank of England official Paul Fisher told Britain’s Daily Mail that he’d consider voting in favor of a revival of the asset purchase program in the event the economy took a “sudden downturn.” His mission is to ensure the economy makes it through a soft patch and only if it does should the “inevitable task” of raising rates begin. Mr. Fisher’s comments weighed on the pound after he noted that the economy was challenged by zero consumption, which was vulnerable to downside shock. The pound rebounded as European spirits were buoyed and rose from a five-day low at $1.6305 to $1.6417.
Aussie dollar – The Aussie found the going tough overnight in light of ongoing weakness in regional stocks, where investors were left staring at losses of near 2% for most indices. A trade report for April was somewhat disappointing with exports still failing to rebound by as much as might be expected. April retail sales were surprisingly strong putting in a monthly increase of 1.1% compared to a forecast of 0.4%. Department store sales rose by 3.6% as shoppers increased spending on clothing and footwear by 1.2%. It took a recovery in the euro to lift the Aussie from its lowest price against the dollar since last Wednesday and it’s now trading higher on the day at $1.0659 U.S. cents.
Canadian dollar – Weakness in the U.S. employment market helped send the Canadian unit reeling midweek with further spillover evident on Thursday. The greenback rose pushing the Canadian dollar back to $1.0200 U.S. cents before dealers seized the moment to embrace rising risk appetite following the euro’s revival. There is no data due for Canada until next week.
Japanese yen – Prime Minister Naoto Kan managed to survive a vote of no-confidence by assuring lawmakers that he’d resign after the March earthquake disaster is contained. Weakness in stocks sending the Nikkei down 1.7% overnight sparked buying of the yen lifting it to as high as ¥80.67 on Thursday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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