Thursday March 4, 2010

The euro is suffering just a little from the 'morning after' syndrome and is so far unable to hold onto gains inspired by the austerity of the midweek Greek budget. The tone could be considered less optimistic rather than one of increasing pessimism, however. That sense spilled over in to some weakness for the Australian dollar where dealers used the lack of appetite for the euro as rationale to ease up on the Aussie.


Euro - In response to the Greek budget approval by its government the European Central Bank released its view. It stated that the adopted measures appeared convincing and that it appreciated the Greek government's recognition of the need to rapidly adopt and implement decisive structural reforms. And while the action appears to have found widespread appeal, it has guaranteed a seat for PM Papandreou with German Chancellor Merkel on Friday in Berlin. However, Ms. Merkel was at pains to tell German television that the budget measures did not guarantee any financial aid from the EU. This tone has possibly knocked some of the recent euro gains back a notch, especially give the Greek line that, having fulfilled requests for it to get its house in order, the ball is now back in the court of the EU.

The ECB meets and delivers a highly likely unchanged stance on its 1% short rate today and central bank watchers will listen closely to the press conference later this afternoon to see whether the ECB intends to change its seven day, one and three month unlimited liquidity provision. Most ECB watchers admit that the Greek situation has created a road block to the ECB's proposed exit strategy. The euro currently buys $1.3685 having reached $1.3736 midweek. The euro slipped by a whole cent below there at its weakest so far this morning.

U.S. Dollar - The destiny of Thursday's trade will be molded in part by the direction of initial claims data and chain store sales data. Investors will take a sharp breath if initial claims rise above 500,000 at 8:30am ET regardless of the impact of winter storms. Friday sees the release of official employment data in which the current forecast calls for a decline of 65,000 in the workforce. Risk aversion will become the name of the game if initial claims data plots another outlier. Health of consumers is also put to the test later in the morning with ICSC chain store data where January data showed a 3% gain. Naturally, a rising rate of unemployment and weakening asset values have the potential to hamper consumption, yet one always has to remember the inverse: While 10% of the population is unemployed, the 90% are still out there spending. The dollar index is marginally higher this morning.

British pound - The Bank of England signaled unchanged rates and no change to its £200 billion bond-purchase program today. With an election looming most likely during May, investor nervousness over a balanced political outcome has rattled investors. The Bank has the power to extend its buying program but likely wants to await results from the first bout of stimulus before acting further given the encouraging although tepid recovery. Logically, any change would likely accompany the May quarterly inflation review. However, it will also want to hear the timetable of the new government's plans before deciding to act further.

A recent ComRes Ltd. poll showed a narrowing in the lead of the Conservative party, whose leader David Cameron has promised early action with spending cuts aimed at tackling a budget deficit the size of that of Greece. Prime Minister Gordon Brown has warned the electorate that such measures would almost guarantee a double-dip recession for the United Kingdom. The Halifax Building Society also revealed a fresh 1.5% decline in the value of British home prices during February. The pound is unchanged today at $1.5105 and decisively higher than a $1.4782 low on Monday. The pound also strengthened against its European counterpart where one euro buys 90.46 pence.

Aussie dollar - A narrowing in the trade gap for January didn't much help the Aussie dollar earlier. Government data showed that a rise in the value of iron ore exports helped narrow the deficit at the end of the year from A$2.1 billion to A$1.2 billion in January. The weaker euro today put somewhat of a dampener on appetite for the Aussie, which fell to 90.23 U.S. cents.

Canadian dollar - Traders seem to have the bit between their teeth in terms of the Canadain dollar, which continues to build on weekly gains. The loonie broke Wednesday's high accelerating to 97.37 this morning as investors consider the timetable for interest rate advances from the Bank of Canada in the second half of 2010. The Canadian unit currently buys 97.13 U.S. cents.

Japanese yen - Appetite for the Japanese yen was marginally firmer overnight as the fiscal year end approaches at the end of March. Exporters reportedly repatriated more overseas earnings and drove the yen to ¥88.14 before the dollar rebounded somewhat to ¥88.47.

Andrew Wilkinson

Senior Market Analyst