Euro recovers as Greek default worries lessen

IB FX Brief: Risk recovery and kind words spark euro recovery

An air of relief descended on currency markets as dealers accepted comforting remarks from European officials likely to attend a crucial meeting this Thursday, which many see as a make-or-break day for the single currency. Peripheral bonds advanced after days of drubbing by a chorus of increasingly nervous investors over growing fears for a spillover of contagion surrounding the sovereign debt crisis. Stocks advanced as did the euro as those fears softened.

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Euro – The euro is proving resilient and avoided a rerun of last week’s excursion below $1.4000 following comforting comments from the finance minister of Greece, who said that resolution to the sovereign debt crisis is “attainable.” ECB governing council member and Austrian central bank chief Ewald Nowotny hinted at a compromise to the problem of whether or not the European Central Bank could accept defaulted Greek government bonds as acceptable collateral. Under certain circumstances Mr. Nowotny indicated that it could, hinting that parties may yet circumvent the obstacles thrown at them by ratings agencies. The euro rebounded from $1.4070 to reach $1.4214 in New York.

U.S. Dollar – The dollar failed to revive despite what might be described as an outlier number in terms of a June housing starts report published earlier. Starts rose by 14.6% to an annualized pace of 629,000, which is largely at odds with an already unhealthy glut of housing inventory and an overhang of foreclosures. While the number might smack of a rebound in activity, it can hardly be described as a turning point in construction when mortgage application data points in the opposite direction. The dollar index is lower by 0.5% at 75.02 after today’s data as risk rebounds and the safety aspect of the dollar is in lesser demand today.

Aussie dollar – The Aussie fell to as low as $1.0561 following the release of the July minutes from the Reserve Bank’s latest meeting. The report showed that policy makers felt less rushed to further tighten monetary policy on account of the most recent flow of data and given the subtle change, they felt it would be prudent to sit still and observe events unfold. The recovery in global stocks later buoyed the Aussie unit, which rose to as high as $1.0697 as shorts covered positions and fresh longs were inspired to choose the unit as a proxy for a risk-on session. Short-term interest rates have been left unchanged at 4.75% for eight-straight months now and while the Aussie dollar has lost the support of the forward-looking yield curve as a prop of support, the jury remains split on whether the next move will prove to be higher or lower. Today’s price action is not a good indicator for the local dollar’s prospects given the surge in risk appetite.

Canadian dollar – The Bank of Canada stood by its desire to remove its loose monetary policy at today’s monetary meeting, but maintained its 1% short-rate setting for the time being. The accompanying statement removed the word “eventually” concerning the timing of any future tightening of policy, but served to ignite a surge in the rally of the Canadian dollar to trade around $1.0500 U.S. cents. The committee recognized the clear risks of further fallout from the European sovereign debt crisis and said that it was best to maintain unchanged policy as a safeguard against the clear risks that policy makers fail to contain future damage to the global economy. The Bank follows up on Wednesday with the release of its quarterly economic assessment of the health of the economy.

Japanese yen – There remains very little movement in the dollar/yen pair as risks wax and wane. The dollar is mildly lower at ¥78.99 this morning following the latest reports of the health of Japanese consumers. Nationwide department store sales edged ahead by 0.3% in June and 0.4% in Tokyo compared to one year ago. The data has obviously been skewed by several disasters in March but the consumer appears to be making a gradual return. The yen eased to ¥111.79 per euro and also eased against the British pound to ¥127.29.

British pound – Despite a sharp dip in the pound’s value in response to the growing phone-hacking scandal at the News of the World, the unit recovered on Tuesday to trade as high as $1.6155. The close ties between the Prime Minister and former Chief Executive of News International, Rebekah Brooks, are coming under increasing scrutiny so much so that David Cameron was forced to cut short an African tour and return to deal with the crisis. NewsCorp owner Rupert Murdoch and son James today face a parliamentary committee to answer questions about their role and journalist practices. Per euro the pound is unchanged at 87.90 pence.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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