Euro rebounds ahead of EU meeting

IB FX Brief: Euro gains ahead of EU meeting

The dollar weakened ahead of a meeting of European officials later in the week as expectations build for a positive outcome. Greek Prime Minister Papandreou has already coined the outcome as a make-or-break event for the zone although he doesn’t seem to know much more than the rest of us. In the meantime investors continue to flood back into equities, inspired by strong earnings growth adding to pressure on the dollar where an earlier positive mood is falling by the way side.

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Euro – The euro continued on a second day of gains as dealers felt assured that an EU summit on Thursday would deliver some sort of lasting resolve for the Greek debt situation. In turn such resolution would put a stop to the threat of contagion that has seen the cost of government borrowing in Spain and Italy rise by 70 basis points since the end of June. Optimism towards the outcome lifted the euro to a session peak at $1.4238 and despite an earlier warning from German leader Angela Merkel who attempted to play down expectations that an immediate solution can be found.

U.S. Dollar – The dollar again suffered as creeping optimism for a solution to Europe’s woes is close at hand. Stocks surged again on Tuesday and with a near-zero cost of borrowing, the dollar remains a favored tool in the carry trade, which naturally weighs on its worth. Short dollar positions turn into long stock trades, which win big when the broad market rallies. Kansas City Federal Reserve Chief, whose string of votes during 2010 in favor of normalizing monetary policy to at least 1% matched a three-decade record, told an audience yesterday that after living through three crises, he has first-hand understanding of how the bubble-machine works and, “guess what? Zero interest rates create the conditions for bubbles,” said Hoenig. Based on adjusting to America’s excesses of the past two decades, Hoenig predicts a modest pace of growth this year and next of between 2.5-3%. The dollar index weakened by 0.5% against a basket of trading partners ahead of a report expected to reveal a rebound from a six-month low for existing home sales. Weekly MBA mortgage applications jumped by 15% as refinancing surged 23% through last weekend. Few signs of life yet, however, for the dead-in-the-water housing market despite a jump in housing starts during June when good weather inspired construction companied to catch-up on previously stalled projects.

Aussie dollar – The Aussie appears to have overcome concerns in the overnight session that a European debt solution was not likely to prove such a quick fix. The Aussie earlier fell to as low as $1.0710 after a Westpac leading indicator compiled using data from May pointed to lower economic activity six months ahead. The index previously reported in April was also revised lower. A DEWR index of skilled vacancies advertised on the internet put in a second monthly flat performance perhaps indicative of a fatigued labor market as global growth slows. The Aussie bucked up as global stocks resumed a rally. The MSCI Asia Pacific index rose by 1.2% further instilling confidence in the unit, which rose to as high as $1.0759 in New York.

Canadian dollar – An unexpected leap of 1.9% in wholesale sales for May easily beat a forecast of 0.1%. However, a second daily gain for the local dollar was so well entrenched that profit-taking appears to have set in. The unit earlier rose to $1.0542 U.S. cents but ran out of upside room ahead of the release of the Bank of Canada’s Monetary Policy Report later on Wednesday morning. The central bank left policy on hold at 1% one day ago but failed to remove its threat to lift policy at some future date indicating it felt prudence concerning the external environment was the best course of action for now. The loonie recently traded at $1.0516.

Japanese yen – A report revealed consumers felt more optimistic today than they do tomorrow and underpinned gains for the yen versus the dollar. The coincident index for May edged ahead to 106.3 while the forward looking leading indicator fell by about as much to 99.6. Convenience stores in June rose by an annualized 9% pace compared to a gain in May of 5.7%. The yen rose against a weaker dollar apparently preferred by wary investors rather than the greenback and reached ¥78.78. The unit remains unchanged per euro at ¥112.07.

British pound – Minutes from the recent Bank of England monetary meeting were slightly less dovish than those at the time of the June MPC meeting. Chief economist at the Bank, Spencer Dale maintained his preference for an immediate rate increase along with outsider Martin Weale. The most recent inflation reading fell sharply to 4.2% although remaining at more than twice the 2% target ceiling set by the Bank. In June external member Adam Posen’s call for further quantitative easing seemed to find favor around the room. However, the lack of discussion in this month’s minutes indicates that other members may have cooled to the idea and helped lift the pound against an already tired-looking dollar. The pound reached $1.6147 against the greenback while falling per euro to 88 cents.

NOTE: Andrew will be taking time off over the next week. This will be the last Forex update until Wednesday July 27.

Andrew Wilkinson

Senior Market Analyst

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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