A moderate rebound in risk appetite is eating into the dollar’s recent gains in fairly directionless trading at the outset of a new trading week. The data-free calendar has investors searching for direction leaving them focused on the apparent gridlock between European lawmakers over Greece. In Japan the Bank of Japan is increasingly expected to announce a new set of stimulus measures at the end of a two-day meeting on Tuesday.
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Euro – Division amongst lawmakers earlier weighed on the single currency before the dollar weakened as risk appetite reared its head at the outset of New York trading. Investors continue to envisage a near-term path of success for ongoing discussions between the EU, IMF and the ECB. German Finance Minister Wolfgang Schaeuble insists that there must be room within the negotiations for private investors in Greek government debt to shoulder some of the burden. But taking a loss or by extending the tenor of maturing bonds would be seen by the ECB as a potential default according to its President Trichet. A recent hot-and-cold attitude on the matter is frustrating investors’ hopes for a resolution on the matter and on Monday drove the euro within a penny of its lowest for the month of June when it reached $1.4321. The unit subsequently bounced to $1.4391.
U.S. Dollar – Investors appear willing to buy the dollar when the going gets tough aiding its position as a safe haven currency. The dollar was firm in the European session while equity futures were lower but optimism typical of a Monday morning quickly bashed the dollar’s strength over the head. Later in the week analysts expect producer and consumer prices to moderate while retail activity last month is expected to decline. The dollar index eased by 0.2% to 74.67.
Japanese yen – Unexpected weakness in a reading of machinery orders during April hampered the yen overnight. Orders declined by 3.3% on the previous month contrary to a consensus expectation for a rebound following the March disasters. Machine orders are a reliable predictor of capital spending over the forthcoming three-to-six months and with the inability of the economy to show signs of post-trauma rebound, investors looked to the Bank of Japan’s June meeting in hopes for further stimulus. The Nikkei newspaper said that the central bank may announce on Tuesday a new lending program offering hundreds of billions of new loans to companies without real estate available for collateral. The yen suffered against the dollar amid such speculation easing to ¥80.69 before an early-morning rebound in U.S. stock futures took the edge off the dollar’s strength. The yen subsequently traded back higher to reach ¥80.25 in early New York trading.
Canadian dollar – The Canadian dollar failed to take advantage of a rebound for risk appetite given the expected data outcome in this week’s economic data pipeline. Weakness in the U.S. economy continues to frustrate the ambitions of the loonie given the close trading relationship between the two economies. Crude oil prices remain weak on Monday, excluded from any risk rebound and partially behind a muted gain for the local dollar, which advanced to $1.0226 U.S. cents.
British pound –The Bank of England in today’s Quarterly Bulletin referred to inflation as being “reasonably well anchored,” despite its ugly performance relative to other leading nations. At 4.5% the pace of increase in consumer prices is twice that of the continent although as the Bank claims, the runaway is explained by sales tax increases and energy inflation. The pound has recently suffered as investors have slowly come around to an understanding that the central bank was winning the media war over the need to tighten monetary policy. The pound took advantage of the European policy spat over Greece and rose for a fourth day versus the single currency rising to 88.13 pence. Against the dollar the pound rose to $1.6324.
Aussie dollar –The Aussie rallied despite a shortfall in new loans advanced by Chinese lenders. While that could be a sign that the authorities face less need to restrain activity in the world’s second largest nation the Aussie rebounded from a nearly three-week low to trade at $1.0568. Despite a recent softening in expectations surrounding the need by the RBA to keep tightening its monetary stance, the Aussie remains relatively well supported by the fact that at 4.75% it carries the highest yield among developed nations.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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