Demand for dollars is showing up in European money markets as banks scramble to borrow cheap funds, which in turn is forcing near-term funding costs in the United States. Bankers desperate to remain liquid during the latest phase of the European sovereign debt crisis have forced the value of the dollar to its highest in three weeks, not only on account of its safe haven status, but also now as banks turn to the swaps market to churn whatever source of funding they can back into desperately needed funds. At the same time the single European currency unit is sinking across the board as storm clouds once again gather over the horizon.
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U.S. Dollar – The dollar index has now added two full index points so far this week to reach 76.00 on Thursday as its value soared by taking advantage of the best of both worlds: At least both sides of the Atlantic. The European sovereign debt crisis has the throttle fully open and televised scenes from strike-torn Athens are reminiscent of those that sparked the so-called “Flash Crash” in May 2010. The day before the legendary decline in U.S. benchmark indices the WSJ carried a front-page picture of the burning body of a policeman unlucky enough to have been hit by a firebomb. Tensions across Europe are showing up in elevated fear across a variety of asset classes as fears spill from one arena to the next. The dollar today also got an unexpected boost from a rise in new housing starts and a sharper dip in initial jobless claims.
Euro – With his Parliament under siege, Prime Minister Papandreou offered up his position as the nation’s premier to anyone who felt they could do a better job of squaring the circle. Today the political leader will reshuffle his cabinet and faces a vote of confidence across lawmakers. The euro fell on fears that leadership changes might result in an attempt to renegotiate the terms of its bailout program. Moody’s also warned that it might downgrade French banks exposed to Greece, while ECB council member Nout Wellink proposed that the region’s emergency fund may need to be enlarged if private bondholders are forced to provide additional financing for Greece. The euro has tested $1.4075 over three separate hourly timeframes and having failed to pierce below on a sustained basis has left investors concluding that maximum selling pressures have past. The euro has subsequently recovered to $1.4150.
British pound – Analysts failed to predict a bearish enough view of consumption in May as shoppers closed their wallets after a warm and holiday-laden April on account of the royal wedding. Retail sales across Britain fell by 1.4% between months leaving sales ahead on an annual basis by just 0.2%. The report massively undershot market expectations and caused the pound to plunge to its weakest in three weeks reaching $1.6079. The statistical office cited retailers pointing to high fuel costs and prospects for employment as reason to stay at home. The decline was the biggest in 16 months while a 3.7% slide in food sales was the sharpest in almost three years. The pound built on declines resulting from a midweek report showing the largest jump in jobless claims in two years. The pound also eased per euro to 87.71 pence.
Aussie dollar – With risk appetite a shot topic, the Aussie also slid to a three week low reaching $1.0477 U.S. cents. Demand for higher yielding currency disappeared as the arguments behind owning such units collapsed as if they were merely smoke and mirrors. With rising risk aversion investors are forced to sell increasingly unpopular trades making it difficult to buck the trend. Those hoping for higher yields in the future can’t stand the heat in the kitchen and face the reality of weakness in such arguments as commodity prices slide in response to both a rising greenback and a slump in prices of hard assets – especially leveraged positions. Despite yesterday’s warning from RBA Governor Stevens over the likely need for tighter monetary policy at some stage in the future, Aussie money markets moved to reflect the opposite today, further weakening the Aussie dollar. The unit recently recovered to trade at $1.0521 from a closing price of $1.0577 on Wednesday.
Japanese yen – The earlier rally for the yen stalled at ¥80.48 as the dollar surged driving the Japanese currency back to ¥80.94. There’s no domestic data to report today that would help explain the movements in the yen, which is vulnerable to gains on risk aversion grounds. The yen rose per euro to ¥114.30 and against the Aussie to ¥85.18.
Canadian dollar – The Canadian dollar fell to $1.0101 versus the greenback to reach its weakest price since the middle of March when events in Japan dulled demand for riskier assets. The unit has not traded at parity with the dollar since the final day of January, yet that line in the sand appears to be the target of speculative selling in conjunction with loonie liquidation today. There’s cold comfort for the Canadian dollar from today’s rally in the price of oil given that a barrel is only back above $95 in a sign of cooling global demand.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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