Two weekend press articles weighed heavily on the seemingly endless summer drought of positive news for the European economic region causing speculators to push the single currency through its June panic low and towards its weakest since May. The fact that the situation is spreading beyond the desperate hunt for a solution for Greece now has investors honing their attention back to the possibility that more powerful peripheral countries are in danger of default. Having kicked the can down the street with no success for so long, European officials are proving that they are close to running out of options. The question for investors becomes whether to remain exposed to any sovereign European entity in the face of mounting pressure across the region.
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Euro – The euro needed no distracting data on Monday. Such signs would only remind investors that not only is the central bank on a fast track to undermine inflation by tightening its monetary stance but also that there’s no way that Europe is about to grow its way out of the towering debt crisis. So far the euro has avoided a plunge below $1.4000 reaching $1.4029 at its lowest point, but has been sinking fast on two key media reports. Germany’s Die Welt newspaper reports that an unnamed ECB official warned that it wants to double the bailout fund to €1.5 trillion in the event the Italian government falls victim to the crisis. Britain’s Financial Times claims that European officials are on the brink of accepting at least a partial Greek default as a necessary evil in order to move to a lasting solution that would permanently reduce and make for a manageable amount of debt. The euro fell by 1% against the British pound and twice as much against the Japanese yen while it is down by almost that amount against the Swiss franc in what many regard as a litmus test for the stability of the region.
U.S. Dollar – The dollar index was propelled 1% higher as investors boarded the life raft in search of higher ground. Many see the dollar as potentially weak as the euro given the towering budget deficit and political gridlock in Washington presenting the potential for a sovereign debt default of its own. However, for now most regard the political shenanigans as little more than brinksmanship that will find resolution before an early August deadline. The U.S. economic calendar is hectic this week although blank to commence the week. FOMC minutes will be closely-watched for possible hints by its members regarding the potential or otherwise for further quantitative easing. Investors will also watch for signs of amelioration in inflation trends within both producer and consumer price reports. The week also delivers the latest health check for the consumer in the June retail sales report.
Canadian dollar – As investors balk at the prospect of buying any available risk vehicles the Canadian dollar is in danger of falling to its lowest in three sessions. The loonie failed to benefit from positive data on Monday illustrating the reach and weight of the European crisis on sentiment. A housing starts report showed the annualized number of units construction workers began building in June was larger than forecast at 197,400 and beyond an upwardly revised pace of 194,100 in May. The Canadian dollar is in danger of falling below $1.0300 U.S. cents on Monday.
Aussie dollar – The Aussie unit is also under pressure against the dollar and at $1.0682 is closing in on support at $1.0657, a break below which has the potential all the way back to $1.0500 from where the recent surge of optimism over Greek resolution began. Adding to regional pressures on the Aussie was a stronger than hoped for reading of inflation in China, which saw investors quickly trash the view taken late last week that the Peoples Bank might soon abandon its tightening policy process.
British pound – A warning from the British Retail Consortium over weak sales and a prediction that the British economy remains vulnerable to a global slowdown helped sink the pound although the situation on the continent was probably the strongest drag. The pound surged on Friday following the weak U.S. employment report only to see gains to $1.6078 evaporate on Monday leaving behind the entire day’s trading range with the unit slumping to its lowest in over two weeks at $1.5905. The euro weakened against the pound to reach 88.30 pence.
Japanese yen – The Japanese yen remained bid surging higher for a second day as the European sovereign debt crisis limped forward. The yen gained against the single currency to a session high at ¥112.72. Interestingly the last time it traded that high was in mid-March when the Bank of Japan led a round of concerted yen selling aimed at restraining the unit from spiraling out of control one-week after the earthquake shook Japan. The yen also jumped against the dollar to reach ¥80.29 in a ding-dong-pitch-battle with the U.S. unit, which was, until Friday, going the way of the dollar. The perception that the world’s leading economy could overcome a possible double-dip was shattered with a rather weak employment report. Investors pounced on the yen on fears that a second-half pick-up in growth was becoming questionable.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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