Friday March 5, 2010

Ahead of the U.S. employment report the dollar is stable. Dealers will be looking at the headline number, expected to be job losses for February of around 50,000, and deciding whether bad weather distortions nullify the data. The dollar may react positively in the meantime due to a risk-aversion bid. On the other hand, a good reading would promote the view that the U.S. economy is chugging along slowly causing some more dollar bulls to challenge a none-month low in the euro.


Euro - However, the fact that the euro has held up against a $1.3432 low against the dollar depressed by uncertainty surrounding the Greek fiscal flare up, could mean that investors have already caused maximum euro destruction in which case there are lots and lots of short positions with no choice but to buy to close out positions. And we all know what happens when the exit hatch gets crowded.

This week's Greek budget has served to thaw the government's access to the capital markets enabling it to find ample bids for €5 billion in 10-year bonds on Thursday. Admittedly the price was rich at 3% more than the comparable cost to the German government, but the fact that three times the number of buyers showed up to buy Greek bonds underscores the improvement in market sentiment in the aftermath of its austerity package.

Following the ECB's press conference on Thursday in which it announced a six month extension to abundant money market liquidity provision, the euro slipped as dealers quickly concluded that the odds in favor of a U.S. rate hike faster than at the ECB were improving. The euro slipped to $1.3550 from close to $1.3700 and today is steady at $1.3581.

U.S. Dollar - The dollar is moving higher against the low yielding yen and Swiss franc. All eyes will be on Friday morning labor data and we'll be looking for any encouragement beyond the impact of persistent snow storms to see if or not the broader trend towards recovery is alive.

Overnight in China the Premmier Wen Jiabao delivered comments that inspired regional stock market gains. He promised to maintain an appropriately easy monetary policy and a pro-active fiscal policy. The provision of bundles of liquidity in order to buoy the economy when domestic external demand plunged left the economy was surplus cash, which fed into real estate and stocks. The Peoples Bank of China has to wrestle with over zealous lending provision by curbing loan activity while the government has moved to create an offsetting tax regime. The news pushed investors towards riskier trades and spurred appetite for the Australian dollar.

Aussie dollar - The Aussie has risen off a low at 89.78 U.S. cents yesterday when the U.S. dollar jumped and ahead of the U.S. labor data peaked at 90.40 cents.

Canadian dollar - The Canadian dollar has largely escaped losses at the hands of the recent appeal of the greenback. Instead the Canadian unit has been largely capped by a range of 96.75 to 97.25 U.S. cents. Ahead of the data the Canadian unit is right in the middle of this range.

British pound - The prospect of a slow recovery and the domination of a nervous election battle is keeping sterling hemmed in a narrow range just above $1.50 before today's data. Against the euro the pound is slightly higher at 90.75 pence.

Japanese yen - The yen is lower today after sources said the Bank of Japan, under growing pressure from the government, will discuss further initiatives to ease already low monetary policy. It's hard to know precisely what they can do to stave off deflation at this point and although the current measures adopted to use quantitative easing to pump more funds into the system, the success is clearly limited. Trying to further reduce monetary policy is akin to trying to make an already thin piece of paper even flatter. The success of the Japanese central bank will be found in its ability to perform origami with that paper and design something captivating. The yen eased per dollar to ¥89.34 and lost ground to the euro at ¥121.35 while it dropped per pound to ¥134.35.

Andrew Wilkinson