At a Berlin meeting on Friday German and French leaders appear to have come to a compromise that would ultimately lay the groundwork for the next round of emergency IMF loans to Greece. Prime Minister Papandreou shuffled his cabinet Friday appointing a new finance minister along the way. Two pieces of news drove currency trading on Friday with a former Fed official predicting a U.S. recession resulting from an inevitable Greek default, while the news conference in Berlin took precedence and sent the euro surging.
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Euro – Alan Greenspan talking on Bloomberg’s Charlie Rose show warned that a default by Greece was almost certain and as such would likely drag the U.S. economy into recession. His prediction, while likely accurate, has been diluted on Friday on account of the positive words flowing from Berlin. German Chancellor Merkel said she’s willing to compromise on demands for bondholders to carry the burden and asks instead for purely a voluntary participation by private creditors. French leader Sarkozy said that such agreement requires the approval of the European Central Bank. Indeed the attitude of its President Trichet and company will be key here although investors have seized the opportunity to drive the single currency sharply higher. Earlier the unit slumped to $1.4127 before a moonshot lifted it to $1.4289. With the entire market watching and reacting to headlines, it’s important to understand that the end game for the ECB here is to avoid any situation under which any ratings agency would claim a default. The bid behind the euro following the Berlin conference is a market attempt to put words in the mouth of the central bank’s mouth.
U.S. Dollar – Of course a surging euro is at this point positive for risk appetite and is surrounded at the end of a choppy week for trading by a reversal in stock indices from Europe to North America as investors hope for a longer-lasting resolution to the crisis. The dollar basket has slumped by 0.5% with the greenback taking slingshots left and right from every other major unit. Data due for release Friday may show a rebound for economic activity over the coming three-to-six months. The Conference Board’s leading indicator for June should reverse last month’s dip as fears over supply bottlenecks resulting from the Japanese earthquake events unwind, while a welcome slide in fuel costs may also boost both sentiment and activity. A University of Michigan confidence index is expected to show little change in consumers’ mood.
British pound – An attempt to match Thursday’s weakest moment for the pound against the dollar just failed before rebounding European sentiment dragged the pound up by its shirttails. Attitude to the unit remained grim with investors remaining concerned over the vigor behind the British economic recovery. Just how resistant the central bank is to raising interest rates to tackle inflation running at twice its target pace was embodied in Governor King’s Mansion House speech earlier in the week. Tightening monetary policy “would have meant a weaker recovery, or even further falls in output” and “a risk of inflation falling well below the target in the medium term.” The pound bounced from its session floor at $1.6093 to a high at $1.6194.
Aussie dollar – The Aussie was perhaps the biggest beneficiary of the rebound in confidence Friday turning from a session low against the dollar at $1.0506 to $1.0635. The unit was subject to losses after the Greenspan view further dampened risk appetite and invited a test of Thursday’s lows. Like the pound, the Aussie remained above its weekly lows and remains buoyant as evidence of short-covering continues to offer support.
Japanese yen – The rise in risk appetite has taken the shine off the dollar and cast the spotlight back on the yen, which rallied from ¥80.65 to ¥80.25 against the dollar as European tensions eased. There was also more concern for the health of the domestic economy with May store sales declining 2.4% on a year-over-year basis indicating a further weakening in consumer confidence. Rising economic tensions maintain the spotlight on a rising yen as investors look to the government to find ways to further tackle an already challenging economy. The political straightjacket ensures that the yen is bound to maintain a positive bias when economic bellwethers sound glum.
Canadian dollar – The turnaround for risk appetite reversed an intraday loss for the Canadian dollar as it traded losses for gains against the dollar by rising to $1.0207. That’s more than a penny above Thursday’s panic-driven low for the week at $1.0101 U.S. cents. Later this morning the latest piece of the jigsaw for the Canadian economy will be released and is expected to show a dip in wholesale manufacturing sales of 0.3%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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