There’s no shortage of individual catalysts to drive foreign exchange prices midweek although the single conclusion is a strengthening of the U.S. dollar to its strongest in three weeks. A series of Odd Couples is behind today’s market action as dealers attempt to pin down the relative strength of domestic units against the dollar.
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British pound – It appears that fiscal spending cuts are starting to show up in Britain’s unemployment data. The May reading for jobless claims was far worse than expected as 19,600 more claimants signed up for benefits. An April revision means that for the two months claims rose by 38,000 while before today’s number economists were expecting just half that number. The Bank of England as a result faces less pressure than before the report to start tightening monetary policy as a rising pace of unemployed and rising interest rates would be a rather Odd Couple indeed. The pound managed a gain per euro to 87.87 pence while it also began a tumble from its bed this morning that has gone well through the floorboards and into the cellar today judging by the chart. The pound is down by more than a penny against the dollar and reached a low at $1.6227 at its recent worst moment.
Euro – The European Odd Couple remains German politicians hell-bent on railroading the Greek government to de facto default and a French-backed ECB increasingly alarmed by the reality of the implications of such default. News seeping out of Brussels-based discussions indicates that horns are locked at the table between German lawmakers insistent that bondholders burden the yolk of Greek fiscal insolvency and forward-looking ECB members pointing to the response by ratings agencies of a maturity extension for maturing Greek debt. The euro fell out of bed in response as sentiment waned once more. The drop this time was enough to send the single currency crashing through its lowest point in two weeks and recently traded at $1.4268.
Aussie dollar – Two policy statements released in May and June formulate the Australian Odd Couple. In May the Reserve Bank appeared to promise the world a further rate rise down under. However, as inflation fears started to subside the RBA left rates on hold for a sixth meeting and in June said that inflation was likely to remain in its desired band and appeared to indicate that its policy adjustment process was over. However, in prepared remarks delivered in Brisbane on Wednesday Governor Glenn Stevens prepared investors for a resumption of the tightening process when he said that inflation “is more likely to rise than fall” over the next few years. He also said that in late July fresh information on prices would be available and would be “important in our monthly assessment of what monetary policy needs to do.” Governor Stevens’ words are something of a bolt-out-of-the-blue in an environment where an adjustment in commodity prices has enabled policy makers to put the half-drawn sword back into its scabbard. A Westpac Banking Corp. consumer confidence index fell once more in a report released Wednesday making its 101.2 index reading the lowest in exactly two years and highlighted the steady decline in the confidence of around 1200 consumers since August 2010. The Aussie vaulted higher on the Stevens story, but as risk aversion grew fanned by fears over the European debt crisis the unit revered course crashing to $1.0658 U.S. cents.
U.S. Dollar – The dollar index surged by almost 1% to 75.08 and its highest since May 27 as investors ripped other units apart leaving the greenback in demand. Stocks were off to a rocky start following as risk aversion resumed after a one-day pause. Consumer prices rose by slightly more than expected although that doesn’t bring the Fed any closer to acting.
Japanese yen – The yen made gains against the Aussie, pound and euro while slipping sharply against a well-bid dollar. The yen eased to ¥81.06 for the first time in nearly two weeks as the dollar rebounded. May machine tool orders were 34% higher than a year ago according to a government report released Wednesday.
Canadian dollar – The stronger start for Canadian dollar versus the greenback was quickly halted as investors were caught off guard by deteriorating risk appetite on Wednesday. The unit was earlier comforted by a rising price of crude oil but a broad-based decline in commodity prices pulled the rug from beneath both leaving oil trading at $98.55 per barrel and the loonie lower at $1.0282. A 1.3% slide in April manufacturing sales was broadly in line with what economists had predicted as transportation equipment sales slid by 7.8%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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