Thursday May 6, 2010

The song remains the same with the euro feeling the continuous heat from a fully-fledged fiscal debt crisis. Today the dollar surged once more against a failing euro to a fresh 14-month high at $1.2738. Investors find no rationale to change their story on the single currency, and continue to hold it at arms length. One knows that when a rebound arrives, it will be vicious. However, as and when that happens we'll all be left wondering whether this is the real deal or whether it's just an excuse to force a very short market temporarily higher.

U.S. Dollar - The dollar index remains higher and continues to be the market focus. Nothing seems to have the same safe haven impact as the dollar. But today's Swiss franc and Japanese yen strength against the dollar is allowing for some semblance of respite for other currencies. The risk currencies are rebounding from extreme dollar spikes overnight and this maybe responsible for a lesser amount of pressure felt by the euro as it attempts to climb back above $1.2800. Initial jobless claims are due on Thursday morning and forecasts suggest the string of gains will today reach a third week with an 11,000 decline.

Euro - Investors' fears accelerated on Wednesday after Moody's threatened a ratings downgrade for Portuguese debt. ECB heavyweight Axel Weber in a rather matter-of-fact manner pointed out that the Greek fiscal crisis could have grave contagion effects for other euro-area members. In a speech delivered in Lisbon, Portugal where the ECB meets to discuss its monetary policy and strategy, Weber signaled that the ECB does not have to use every means to relieve the situation amid a euro plunge.

However, signs continue to mount that the markets are running out of control. Shares in Euroland banking stocks sank and the cost of insuring against default rose to a one-year high. European stock market averages fell to lows last seen two months ago, as the single currency reached a 14-month low. Investors are watching the ECB press conference closely to see if they have fresh battle plans. Given his sway as the Bundesbank member of the ECB, Axel Weber will use his clout to dilute appeals for an ECB initiative to buy up government bonds in the secondary market. It's far from clear that such action would support the euro even if this is what the ECB would like to see right now.

The euro also weakened versus the Japanese yen to its weakest in 14-months. The decline to ¥118.86 overnight now sets off a target at ¥112.12. The euro stabilized in the aftermath of strong German factory orders for the month of March where data showed a robust monthly improvement of 5% helping send the euro up where it is currently trading at ¥119.75.

The euro was also weaker against the Swiss franc where it appears the Swiss central bank is more inclined to let the beleaguered euro find its own level. A year ago the SNB began a vocal and active intervention policy in an effort to prevent deterioration in its nation's manufacturing base as the Swiss franc strengthened making life more difficult. The market's observation that the SNB appears less likely to intervene is also drawing franc strength against the U.S. dollar where one dollar buys Sfr1.1092 from Sfr1.1250 yesterday.

Aussie dollar - Weaker than expected retail sales data for March showing a 0.3% gain compared to a predicted 0.7% pace of gain sent the Aussie unit reeling to breach 90.00 U.S. cents for the first time since March 5. Naturally the data aggravated the Aussie's weakness given the propensity of the contagion to harm global growth. A pause in the rate rising cycle for the RBA might be appropriate given current turmoil. In the longer term that might not be the case, but given the gravity forex traders assign to current news, one can easily understand the move. Just last week I carried a comment from an RBA official stating that what happened in Greece would have little impact on the Australian economy. I doubt he's eating his words but the market view has seemingly turned 180 degrees since that time. The Aussie currently trades at 90.37 cents.

Canadian dollar - The Canadian dollar's recent slide continued through the early hours as the growth-sensitive currency fell to 96.08 U.S. cents. As some stability returned to the currency market and on the eve of a jobs report likely to reaffirm the independent health of the Canadian economy the local dollar rebounded to 96.83 cents.

British pound -The pound remains weaker against the U.S. dollar at $1.5077 as voters bombard British polling stations around the country. This contest is likely to be the fiercest since the 1974 stalemate and it won't be until the early hours when votes are tallied that we know whether or not the Conservatives will be able to form a government. The outcome admittedly has the potential to weigh on the currency, but as previously noted I don't see politics getting in the way of drafting a fiscal-reduction package once a government has been established.

Japanese yen -Investors returned after a three-day holiday for a day or so in Tokyo to catch up on world events. Japanese stocks fell by 3.3% as they adjusted to the horror stories of the last several sessions causing investors to draw in their horns. The yen earlier strengthened to around ¥93.25 against the dollar before it gave some back and is now trading at ¥93.92. The yen is now only marginally weaker on the day against the Aussie dollar, which buys ¥84.95 and the pound, which buys ¥141.74.

Andrew Wilkinson

Senior Market Analyst