IB FX Brief: Europe has a bad hair day

A confluence of bad events spelt a plunge to multi-year lows for the euro in the wake of Thursday's EU accord over Greece with market participants fearing ministers did little more than paper over the cracks. Eurostat reported a stall in fourth quarter GDP just to make matters worse and raised fears that economic recovery is stumbling. The People's Bank of China made its second attempt to rein in excessive lending by lifting its reserve requirement by 50 basis points. Yet again investors took flight from riskier assets over a rather premature fear that China's economy is slowing down. Of course this is the 'glass half empty' view of strengthening demand in Asia. Nevertheless, the monetary tinkering served to underpin demand for the greenback lifting the U.S. dollar index to its highest in seven months.

Euro - For sure there was no glossy brochure delivered at Thursday's ministerial press conference. There was no financial take away for reporters. The power of the resolute words offering a determined and coordinated action if needed to safeguard the stability of the Eurozone fell short of a wad of cash. According to EU permanent president Herman van Rumpuy the nature of the political statement was due to the fact that Greece hadn't actually asked for financial help.

The euro is ending the week in severe pain, although the silver lining here is that a weaker euro will help first quarter growth from the export side. Against the dollar the euro reached its lowest point since July 2009 at $1.3532 and is currently trading at $1.3667. It also reached significant stress points against the Aussie dollar, which traded at a decade-long high, while against the Canadian dollar the euro slipped to its weakest in three years. But the weakness was also felt against its Nordic cousins too. Both Swedish and Norwegian currencies rallied to two-year highs against the single European unit.

But as with the Chinese glass half empty routine, it does feel as though everyone is leaping to the same negative conclusion that the outcome of the Ouzo crisis is a botched job. But I'm not sure I feel the same way and the financial elements likely to be delivered early next week may well materially change the picture for the better. The accord endorsed Greek plans to reduce its 2010 budget deficit during 2010. And although Greece isn't asking for financial assistance I doubt it hasn't gone unnoticed that without it the government faces an uphill struggle in funding debts coming due. By swallowing the pill, Athens would certainly sleep better at night.

With the medicine, however, the EU has spelled out the guidelines that it insists Athens must take in order to receive financial assistance most likely from Germany, France and other core nations. Those nations will now exercise moral suasion to maintain pressure upon the Greek government to adopt additional measures to eradicate the deficit by 2012.

The euro faces a sticky run up to the weekend especially in light of the release of U.S. retail sales data this morning. It does look as though much of the easy money may have been made by now in selling the euro. From here, however, the going could be much tougher if papering over the cracks is merely the preparation for a major work of art from skillful financial engineering.

British pound - The pound arrested its midweek slide against the dollar and made good headway rising to $1.5741. However, that risk aversion demand for dollars drove the pound all the way back to $1.5600 and close to its intraday low as equity futures prices waned. The pound did, however, take full advantage of euro weakness and reversed sharply its earlier weakness seen on Thursday. The pound rejected a decline to its 200-day moving average and has recovered two pennies to stand at 86.91 per euro.

Aussie dollar - The Aussie was jumping like its native kangaroo earlier in the week, recovering lost ground brought on by risk aversion and concerns that the RBA might have come to an end in its bout of monetary tightening. But strong employment growth put the likelihood of higher interest rates back on the agenda this week and risk appetite was riding high. The Aussie recovered a week's worth of declines and rose earlier to 89.20 U.S. cents. The Chinese measure to restrain lending set its ambitions back driving the unit down a penny and a half, with the dollar now trading at 88.32 cents.

Japanese yen -The risk aversion tone only had one clear winner this morning as the dollar rose back to ¥90.11.Investors hope for good things from Japan's GDP report, which comes out on Monday. The euro slipped to ¥122.40 and the pound eased to ¥140.64.

Canadian dollar - Despite Friday's risk aversion playing out in a stronger greenback and weaker commodity prices, the Canadian dollar continues to remain relatively well supported. Despite a dollar surge overnight the Canadian unit is only marginally weaker at 95.10 U.S. cents.

Andrew Wilkinson