Escalating turmoil in Greece during the past several weeks has forced investors to avert their gaze from tall tales over the return of inflation. Central bankers around the world have also admitted that prudence dictates monetary stability in the face of rising risks to inflation at a time when future growth is in doubt. Yield arguments along with growth prospects typically underpin commodity sensitive currency units but in several cases, a dramatic shift in the yield curve has killed such prospects in recent weeks. The Canadian dollar soared on Wednesday after domestic inflation was hoisted further than economists expected as most categories followed the lead of a jump in the price of gasoline.
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Canadian dollar – Proving that it’s not only about European politics at the moment the Canadian dollar felt the strong tailwind of a jump in inflation in a midweek report. The unit built on gains made this week as investors set sail on a risk-rally betting that Greek politicians would follow Papandreou’s call to “do their patriotic duty.” The local dollar jumped by a penny to $1.0275 U.S. cents on news that consumer prices rose by 0.7% for the month of May and at a pace twice as fast as expected. The report left prices 3.7% higher than a year ago as gasoline soared by a staggering 29.5% in the month and at the fastest pace since Hurricane Katrina landed in August 2005. Meanwhile food costs rose by 4.2%. Earlier in the week the so-called loonie fell to its lowest in three months at $1.0087 cents. In his testimony to the senate banking committee earlier in the month Governor Carney predicted a short-term pick-up in consumer prices before it fell back to target by the middle of next year. But investors on Wednesday grew concerned that surging prices might prepare the groundwork for an imminent rate increase. Yields on government bonds jumped by almost 10 basis points immediately following the report and maintained that wind in the sails of the Canadian dollar.
Euro – The single currency rose to its highest in a week in anticipation that Greek lawmakers will manage to get past angry mobs protesting loudly outside the Athens parliament and find it in their hearts to approve job cuts among other items at today’s crucial vote. Many of the striking public sector workers will find themselves out of work in no time assuming that a vote on Thursday finds enough support to implement the mandated austerity measures. As more investors come around to the view that a financial Armageddon is likely to be averted for yet another month or so, the euro’s appeal comes back into fashion. Despite a dip to an eight-month low in a key reading of consumer confidence in the economic outlook for the region the euro remains higher on the day at $1.4421.
U.S. Dollar – As risk-appetite improves the appeal of dollar denominated assets turns sour leaving the dollar index trading lower on the day and not far above its weakest in a week. With little on the economic agenda in slack pre-holiday trading, the dollar is trading down on hopes for the safe passage of the Greek austerity vote on Wednesday. However, it feels premature to write off the dollar on this single outcome given the challenges that remain in coming weeks. The Greek vote simply addresses the next wave of financial assistance from European partners. It does not speak to the prospect of a Greek default. While politicians negotiate the barricades on the streets of Athens, German finance ministers face similar obstacles at a meeting in Berlin. Officials begin negotiations with German bankers and insurance companies in an effort to fathom a way of convincing them to extend or rollover forthcoming bond maturities in a way that would defy a technical default.