Trying to determine quite where the euro currency will be on any given day has become little more than a coin toss as back-and-forth dialogue seems subject to frequent change. ECB President Trichet now rejects Greek debt restructuring. His comments today continue to reflect yesterday’s sinking sensation for the single currency. In Britain data continues to need adjusting on account for the royal wedding but make no mistake about it, the economy continues to slide notably as evidenced by April output data. Investors’ appetite is ending the week on a hum-drum note as central bankers added further caution to the economic recovery this week.
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Euro – Conscious of falling foul of ratings agencies definitions a debt default, Trichet said that it was “certainly not our intention” when asked if the central bank would join perhaps willing private investors should they agree to rollover maturing Greek government bonds. Earlier in the week the picture seemed clearer and investors ramped up the euro feeling glib that resolution might be at hand. But the ECB on Thursday took its hand off the inflation-tiller when it nudged lower its prediction for inflation next year. Investors took that as a signal that the ECB would be less aggressive in pushing for tighter monetary policy beyond a July rate increase. Consumer prices in May remained unchanged as they did in April according to a report on Friday leaving the annual advance at a static 2.3%. Wholesale prices across the nation were also flat between months allowing an easing in the annual pace to 8.9%. Such evidence reminds investors that rising commodity prices have started to lose steam in terms of inflationary effects. Having rallied in to last Friday’s close to finish strongly at $1.4635 the euro finds its fortunes different just seven days on and is staring at a loss versus the dollar trading at $1.4458.
Canadian dollar – Employment rose during May by a little more than was expected according to today’s report, although not sufficiently to change the prospect for a Bank of Canada tightening anytime soon. The loonie rose following the addition of 22,300 new jobs last month with full-time workers adding 32,900 positions while 10,600 part-time jobs were lost. And although the unemployment rate slid from 7.6% to 7.4% in a sign of health, the counterbalance here is a downtick for the participation rate to 66.8%. The Canadian dollar buys $1.0283 U.S. cents having earlier weakened to $1.0238 cents ahead of the report.
British pound – Data continues to flow the way of the dovish majority at the Bank of England. One wonders what color the air would be at the next policy meeting had the MPC been persuaded to address untamed inflation in light of recent reports confirming ailing economic health. Analysts were primed for an unchanged reading for industrial production throughout April and of course were shocked by a slide of 1.7% and thanks to a regressive revision to earlier reported data the year-on-year pace of output now stands lower by 1.2%. Economists also expected the mildest slip in manufacturing output but were horrified to learn of a 1.5% slide reducing annual output to growth of just 1.3%. Given the extra days off on account of royal wedding celebrations you’d think that analysts would have had time to figure the loss of order on account of the missed trading days as well as spend time assessing the impact from the aftermath of the Japanese earthquake. The pound sank from $1.6375 to $1.6214 in one of its all-too frequent OMG moments. Dousing the monetary tightening flames further was a cooling in cost pressures with input prices declining by 2% during the month and at twice the predicted pace leaving the annual pace of gain at a still admittedly high 15.7% pace. Yet still the link to cooler commodity prices remains clear and vindicates those at the Bank who have argued that runaway inflation isn’t their fault.
U.S. Dollar – While it’s been a poor week for the economic picture book for the U.S., the same isn’t true for the greenback where the dollar index has risen by 0.9%. The basket is higher on Friday as risk aversion continues to bite. Not only that, but fading European interest rate expectations are also fuelling an advancing dollar. Fed Vice Chairman Janet Yellen told her audience in Cleveland at a Federal Reserve policy conference that the Fed would “continue to use its policy tools to support economic recovery and carry out its dual mandate to foster maximum employment in the context of price stability.” Only against the yen is the dollar weaker to close the week as worries over global growth lead short and long end yields lower.
Japanese yen – Overnight weakness in the yen was apparently pounced on by Japanese exporters who sold the dollar to repatriate overseas earnings back into yen. The dollar at its best reached ¥80.46 before the yen rallied as stocks quickly changed gear and ran into losses. The yen rose to ¥79.97 after a report showed an uptick in consumer confidence during May to an index reading of 34.2 after 33.1 in April. Machine tool orders also rose with the annual pace of expansion stretching to 34.2%. The yen also outpaced the euro rising to ¥115.95 while it added 0.8% against the pound to ¥130.45.
Aussie dollar – An early advance overnight for the Aussie ran into the headwinds of declining equity prices on an otherwise data-free day in Sydney. The unit rose to $1.0652 U.S. cents in early trade although even after a surprise boost to Chinese imports during April, the Aussie eased given the potential for PBOC tightening of some description over the weekend. On paper a 28% year-on-year jump in Chinese imports bodes well for Australia as economists look to the world’s now number-two economy to pick up the slack in light of weakness in the world’s largest economy. And while that might become a major them in years to come, investors were disheartened by weakening risk appetite and sold the Aussie unit into the weekend to a loss for the seven days from $1.0715 to $1.0587 cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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