Monday May 17, 2010

The euro appears immune from the old adage that states, No news is good news falling instead to a four-year low versus the U.S. dollar. The number of bearish positions continues to build against the single currency according to CFTC data and no wonder. Despite an EU ministerial gathering in Brussels today, there appears little risk of any coordinated plan to bolster errant fiscal ways to the extent that it would arrest the euro's decline. The mounting number of sales of euros is a one-way bet that even in the cold-light of day is difficult to argue against at this point, although we all know how such train-wrecks tend to end.

Euro - The song remains the same for the euro to begin the week. It traded as low as $1.2235 in European trading after stock market weakness in the Asian time zone once again highlighted the risks to global growth that the situation appears to be creating. The obvious parallel that dealers are talking about is whether or not the Eurozone fiscal crisis is as big as the banking crisis of 2008.

As the fortunes of the euro wanes, the obvious beneficiaries have again been the dollar and the yen. The euro slipped to ¥112.47 at one point overnight although has picked up to ¥114.03 in early New York trading. A recent headline reported that Greece expects to receive bailout money from EU member nations tomorrow, which on top of recent deficit cutting measures from Spain and Italy to accompany the ECB bond-purchase program has helped steady investor nerves over government finances.

ECB President Trichet today said it was time for European governments to deliver a quantum leap in budget control. He said that it was time to control bad behavior, ensure that peer recommendations were implemented and to sanction against future breaches. All well and good Monsieur Trichet, but you have to remember that other timeless adage: Rome wasn't built in a day.

British pound -Prime Minister David Cameron unleashed on his predecessors over the weekend by telling the BBC that his party has uncovered some ugly spending decisions made during the past year or so of the Labour party's administration. He said that those decisions were ones that no rationale government would have made. It is hard to know whether or not the Prime Minister's remarks concern spending decisions that we already know about or whether he's exposing hidden plans. However, the interview has sent a cloud of volcanic ash directly into the flight path of the pound, which took a swan dive to a 14-month low against the dollar at $1.4252.

The new Chancellor of the Exchequer George Osborne said he'd deliver an emergency budget on June 22 in which he's widely tipped to announce spending cuts mounting to £6 billion. It's hard to know whether Mr. Cameron's remarks are anything other than a mighty fine excuse to slam the outgoing government and lay the foundations for future spending reductions at this stage. But regardless the pound continues to feel the weight of its anchor to the euro as a riskier asset at this stage of the economic recovery.

U.S. Dollar - The dollar is firmer once again to start a tough week for anything remotely related to risk. It's index rose 0.3% in early New York trading.

Aussie dollar - Dealers await the minutes from the RBA's recent meeting in which interest rates apparently reached a plateau. With little ahead to make investors fear that the global economy is about to embark on another bout of tear-away growth, the Aussie can't muster enough support to stage anything other than a relief rally. Such recent weakness has sent it headlong towards a three-month low against the dollar. This morning it reached 87.25 U.S. cents before a reversal of fortunes lifted it to 88.06 cents. Ongoing concerns on the impact of self-restraining European measures to heel gaping budgetary wounds are weighing heavily on growth-sensitive currencies.

Canadian dollar -Canada's dollar lost about half as much as its Australian bedfellow to start the week. At 96.58 the loonie feels a long way from parity and is lower on the day by 0.3%.

Japanese yen -The Japenese unit felt the benefit of its international safe haven status earlier as it rose even against the dollar to ¥91.76 while against the pound it rose to ¥131.19 and against the Aussie dollar it rose to ¥80.10.

Andrew Wilkinson Senior Market Analyst