After 21-months of trying to figure out how to mend the broken China in the store, EU officials in concluding a meeting on Monday posted a sign in the front window announcing they were “Out to Lunch.” The current crisis of confidence feels somewhat different from past crises during which speculators ganged up to pry tiny fissures wide open before forcing an inevitable crack in the system. It has been said that Italian government debt is tightly concentrated in the hands of a finite number of investors, notably domestic. The reality is that those bond holders may well be a tight crowd, but they too are in panic mode as they lighten the yoke under which they are increasingly struggling to carry their burden.
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Euro – The euro has bounced from its lowest point in four months against both dollar and yen at the start of another harrowing day for trading. We’ve noted previously that all avenues seem blocked to official efforts to find a new way to resolve the crisis. Plans previously rejected by Germany to use the bailout fund to retire Greek debt at a discount have resurfaced. At the same time some have proposed that Greece should temporarily enter default in a move that would bridge one episode of the crisis to a way forward despite staunch ECB opposition to any initiative that might appear in the lexicon of default. Unsettling already nervous investors on Tuesday was the short note that accompanied the conclusion to Monday’s meeting, which said that the EU would be back with a new strategy “shortly” and without setting a timeframe. The euro reached $1.3837 making for a 7.5-cent shift demise since Independence Day. Proving that trading is ever-reliant on scouring the headlines, the unit rebounded after a successful auction of Greek bonds. However, one well-received auction isn’t going to find any applause in Rome.
U.S. Dollar – Again you have to look back to March to see the last time the dollar index traded as high as Tuesday’s 76.72 lifted as investors chose the dollar over the euro. Against other risk safe havens the dollar is weaker and trades lower against both the Japanese yen and the Swiss franc, although the greenback recently popped its head back above water having trawled close to a two-week low against the European alternative. An IBD measure of small business confidence for June dipped marginally, but has cursory impact on the dollar economy. The May trade balance widened to $50.2 billion.
Canadian dollar – The Canadian unit lost almost one full cent versus the greenback as risk aversion forced dealers out of positions around the world. Later the loonie found its feet and actually made a gain against the dollar. The Canadian recently traded at $1.0312 U.S. cents following a merchandise trade report for international trade showing a second monthly deficit of C$900 million.
Aussie dollar – The Aussie unit buckled overnight as spillover from the European crisis delivered a second session of equity market selling as investors shunned risk. To start the week the Reuters/Jeffries CRB commodity index declined by 0.9%, while on Tuesday the MSCI Asia Pacific stock index slid by 1.9%. Investors lost appetite for the Aussie sending it plunging close to its weakest point in two weeks. Having reached bottom at $1.0527 U.S. cents the Aussie has stabilized and recently traded at $1.0617 cents. A decline to a six-month low in the National Australia Bank reading of business confidence also weighed on the unit. Investors are still banking on the Reserve Bank of Australia to ease monetary policy within the next year, which represents a massive shift in sentiment over the past several weeks and has the capacity to detract from the local dollar’s appeal.
British pound – Good news for the Bank of England was bad news for the British pound on Tuesday after the consumer price index moved into long-awaited retreat, while store sales remained stuck in reverse. The June CPI dipped by 0.1% leaving prices 4.2% higher than one year ago, which is down from a 4.5% at the time of the May reading. And while inflation remains more than twice the Bank’s target rate today’s revelation was unexpected and indicates the unpredictable nature of the series at a time when much of the threat was related to raging commodity price gains. The central bank has stood its ground in face of heated public pressure to raise interest rates at a time when the fiscal ligature has sent a clear signal of impending slowdown. The pound lost further support from any argument that the Bank would shift in to tightening gear anytime soon and slid to $1.5801 cents.
Japanese yen – The selloff around the world for stocks as investors turned defensive saw heavy demand for the Japanese yen, which powered to ¥79.38 and breaching ¥79.50 for the first time since the Bank of Japan spearheaded coordinated intervention to restrain the yen after the March earthquake. The central bank today left its benchmark short-term interest rate unchanged at 0.1%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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