Thursday April 1, 2010

Risk appetite stepped up a notch to start the new financial quarter with investors selling dollars for riskier propositions such as higher-yielding currencies and equities. A raft of manufacturing survey evidence around the world leaves investors with a single-minded assurance that government and central bank policies have worked their way through to recovery. For now that means they can afford to revel in an equity market rally, until they decide to fret over rising interest rates. The dollar is not yet primed for higher rates and as such is coming off second best across the currency spectrum.

Euro - Once again the euro is doing battle with the $1.3500 line of resistance and was prodded to an intraday high at $1.3519 following healthy Purchasing Managers data for March. Across the Eurozone the manufacturing activity accelerated to 56.6 from 56.3 in February. For the German powerhouse, the contrast was more vivid as manufacturing activity rang up a 60.2 reading after 59.6 in February. However, some of the shine was taken off today's data after German retail sales slipped 0.4% on the month for a worse than hoped for contraction of 0.9% over the year.

Worries surrounding the ability of the Greek government to raise the remaining €11 billion necessary to avoid running into funding troubles ahead of May meant that a cloud remained over the single currency today. However, at $1.3496 things could be far worse for the euro, which is still fighting back against the dollar. And this steadiness puts an all-time low today for the euro against the Swiss franc into perspective. There is no all-out war against the euro at this stage and the recovery against the core dollar remains intact. The Swiss franc surged after its manufacturing index roared higher.

U.S. Dollar - Gains for the dollar against the euro and the yen are enough to put the dollar index in positive territory to start the day, although the dollar is weaker against practically everything else. The greenback is caught in a difficult spot one day after a private employers' report showed a dull labor market while many traders will be wary of positioning ahead of tomorrow's crucial non-farm payroll, which until yesterday was widely expected to reveal a large spring turnaround for the labor market.

A gain for employment could boost the fortunes of the dollar on the expectation that the thread from which ultra-low interest rate policy is hanging is set to snap sooner rather than later. However, with manufacturing survey data around the globe proving that recovery is well underway (U.S. data is due later this morning) there is a sense that the dollar is still vulnerable to underperformance even if yield expectations have a change of heart.

 

Aussie dollar - The Aussie found its footing on Thursday having tumbled following retail sales weakness during midweek. There were two catalysts for today's gains. An IMF report slammed the neighboring New Zealand currency saying that it was perhaps 25% over valued. At its present levels the kiwi dollar would exacerbate the current account deficit if left unchecked. This improved the appeal of the Aussie dollar, which already has a 1.5% yield cushion over New Zealand.

Regional stock markets got off to a positive start propelled by further evidence that the pace of growth in China remains bubbly. Two separate manufacturing surveys showed healthy levels of expansion. The HSBC China Purchasing Managers manufacturing index for the first quarter grew at the fastest pace in the six-year history of the data. Meanwhile the official PMI showed a reading of 55 for March surpassing expectations and accelerating away from the 52 reading for February. The Aussie unit is trading this morning at 91.71 U.S. cents.

 

Japanese yen - Domestic Japanese investors are apparently looking outwards to find higher yields beyond the shoreline. The yen therefore weakened even after the Bank of Japan's Tankan survey revealed an improved tone among large manufacturers where the key index fell to -14, which is its best reading since September 2008. The reading indicates a declining measure of pessimists relative to optimists. Non-manufacturing corporations also became less gloomy. The dollar reached a three-month high to commence the new fiscal year at ¥93.75 while the euro buys an unchanged ¥126.26 this morning.

British pound - A perceived reduction in political risk helped extend this week's rebound in the pound where today it reached $1.5250 and extended its gain to a five-week high against the euro at 88.54 pence. Buyers scooped up pounds after a Metro-Harris opinion poll showed a widening in the lead in favor of the Conservative party over the governing Labour party. Analysts say that such a lead if repeated on election day would be enough to give the Conservatives an overall Parliamentary majority. Dealers have shunned the pound for fear of a political stalemate that would leave an awkward public deficit growing in size and dominance in the eyes of the rest of the world. Failure to muscle through political measures to address it could leave economic policy impotent.

 

Canadian dollar -The Canadian dollar has so far rallied to 98.94 U.S. cents today and is again underpinned by gushing oil prices and a stall in the rally for the greenback, which leaves commodity prices at large to make additional gains. With the price of crude oil above $84 per barrel and an ounce of gold at $1,113, the loonie is displaying its sensitivity with a further gain.

Andrew Wilkinson

Senior Market Analyst