Friday March 26, 2010

In a week that has witnessed some wild currency movements including a 10-month euro low, a 1% decline in the pound against the dollar and twice as much weakness in the yen, the question is how rapid any rebound will be. After such movements seasoned traders are accustomed to price vacuums above prevailing levels that suck out short positions and create a rollercoaster ride. So far it's the dollar bulls that have forced further spike higher to start the day. Will Friday deliver or will the substantial volume of euro bears carry over a negative view into next week?


Euro - The euro rebounded from a late-in-the-day assault on $1.3274 on Thursday after a poor showing at a U.S. treasury auction. However, agreement among EU officials has saved the day for the euro, for now at least. Leaders endorsed the path to the IMF and backed a pledge of bilateral loans to its ailing partner in the event of desperation. The news was greeted with delight by Mr. Trichet at the ECB who had previously warned that IMF implication in EU affairs was inappropriate. Clearly what has changed includes the austerity measures taken by Greece as well as the manner in which Greece has been scolded. These may well have been precursors in his mind to an ultimate solution including the IMF. The rally in the euro petered out above $1.3400 before the release of revised U.S. GDP data. It currently stands at $1.3352. It also rebounded to ¥124 against the Japanese currency.

U.S. Dollar - The significance of the weak auction is that bond investors are showing signs of losing their appetite, which means a groundswell of opinion may be forming in that community worried over rising interest rates in the not too distant future. The dollar therefore found lots of additional friends.

British pound - The pound also sank after the release of U.S. data, which downsized the fourth quarter expansion from a 5.9% pace to a 5.6% annualized expansion. In the U.K. fourth quarter total business investment shrank 4.3% on the previous quarter and at an annual pace of 23.5%. While this might be taken as a sign of how hard it has been for the British economy to gain traction, one must remember how out dated such data is today. Nevertheless the pound is weaker at $1.4835 and is lower per euro at 90 pence.

Canadian dollar -The ever-popular Canadian dollar took it in the neck this morning, falling to 97.14 U.S. cents at its current intraday low. The rising greenback is pressuring recent Canadian longs to jump off the bandwagon faster than they joined.

Japanese yen - The yen has had a tough week and at ¥92.74 is down 2% on the week. Rising long-bond yields around the globe are negating the fiscal year-end buying spree. The problem facing the Japanese government and central bank was evidenced today in data displaying an ongoing battle against deflation. During February prices fell and stand 1.2% lower than a year ago. This information hardly helps the recent effort made by the Bank of Japan as it announced a doubling of its loan program to commercial banks. The Japanese economy is still in need of further fiscal and quantitative stimulation at a time when central banks of other developed nations are starting to consider how and when to walk away from there own efforts and close the door on that chapter. The impact is negative on the yen where the Bank is likely a long way off having to consider restricting its monetary policy.

Aussie dollar -An opinion piece published in the China Daily as well as in an Australian daily by Fan Gang, an advisor to the Peoples Bank of China, said that the country might allow for a gentle appreciation of the yuan. An abrupt revaluation of the currency might derail the export boom. The Aussie gained some respite and rose in Sydney as high as 91.16 cents before slumping against a surging greenback in early market trading in New York where it fell to 90.29 U.S. cents.

Andrew Wilkinson

Senior Market Analyst