Friday February 26, 2010

Although the Greek sovereign fears remain close to hand, the forex market is a little calmer to end the week as dealers move to lighten the load a little wrapping up profitable short positions against the euro. In a day in which inclement weather has largely closed Manhattan due to heavy overnight snowfalls, there is a lack of impetus to take further bets in favor of the dollar especially in light of some tepid economic data of late, which in a sense provides a reprieve for the euro. Meanwhile an upward revision to fourth quarter GDP growth is providing some respite for the dollar. Growth came in  at 5.9% after an initial reading of 5.7%.

Euro - The euro is coming back from a hosing on Thursday when it hit a one-year low against the Japanese yen. Dealers are reportedly buying the euro at the end of the week with a real lack of fresh news that would justify taking further risk aversion bets. A weak GDP report from Britain saw dealers ditch sterling in favor of the euro, which gives the appearance of a more robust euro rebound today. Still, those gains are real and the euro is on a roll to end the week. Against the dollar the single currency buys $1.3570 ahead of Friday morning data for the U.S.

U.S. dollar - The dollar index is lower on Friday. A WSJ article reports massive hedge fund positioning against the euros, described elsewhere as career bets against the euro. This much we know on account of explosion of futures positions reported by the CFTC in recent weeks. The news is not exactly a shocker on a day when New York city is under a foot of snow and pinned beneath a snow storm lasting into next week, which will keep many investors out of Manhattan today. 

According to some investors, hedge funds today are buying the euro against the dollar and yen where significant weakness has been evident in recent days. Yesterday the euro slipped to a one-year low against the Japanese unit. Friday economic data brings a revision to fourth quarter U.S. GDP, a February consumer sentiment reading and January existing home sales data.

British pound - An upward revision to the final quarter pace of growth in the U.K. gave traders an immediate reason to cover short positions held in the pound, but the buoyant mood didn't last long. The initial 0.1% rate of growth was revised significantly higher to 0.3%, but a downward revision to the pace achieved in the third quarter meant that the annual rate of contraction deepened by one-tenth to a 3.3% pace. 

Coupled with a decline in business investment during the quarter the report ultimately failed to please. A 1% pace of decline in the value of home values was for the month of February was reported by the Nationwide Building Society, which further dented sentiment. Overnight the pound recovered from a dip beneath $1.5200 helping drive the sterling index to a four month low and an 11 month low against the Japanese yen while against the equally ailing euro the pound reached a six-week low at 88.78 pence.

Aussie dollar - Despite its physical distance from Greece, the Australian economy continues to feel the weight of the fiscal challenges weighing on the Eurozone. The impact remains one of Aussie dollar avoidance as Greek fiscal situations and its entourage in terms of potential ratings upsets grips traders' attention. Overnight the Aussie slumped to as low as 88 U.S. cents before moving back to 88.96 in early New York trade. Next week the RBA decides on whether to lift interest rates for a fourth time and is quite likely to move to 4%. 

The current degree of risk aversion is weighing heavily on the Aussie possibly in part because of the drama surrounding the sharp decline in the euro. The further the single European currency slides, the greater attention it draws to the potential for a sharper slowdown in global growth.

Japanese yen - Industrial output surged 2.5% in January as manufacturers ramped up production to meet strong regional demand. The reading was far stronger than the forecast growth of 1.1%. It was the 11th straight monthly increase. Shipments to China surged as reported in trade data released earlier in the week. At the same time retailers were also kept busy with a 2.6% surge the best performance in 17 months. However, the consumer price index for January continued to deliver news of deflationary waves lapping up on Japan's shores. 

Prices slipped 0.2% between December and January and declined 1.3% on an annual basis. Core prices, which exclude volatile food prices 

slipped 0.6% on the month. The yen is only marginally weaker against  

the dollar on Friday at ¥89.13, despite the dollar's broader weakness with a lack of fresh risk aversion impetus is apparent.

Canadian dollar - Riskier commodity units have recently been shunned and despite its low interest rates akin to those on the U.S. dollar, the Canadian unit has recently fallen from grace. Today, the Canadian dollar is higher at 94.58 supported by a rise in the value of gold and aided by a lack of reason to add to risk aversion positions.

Andrew Wilkinson

Senior Market Analyst