Wednesday April 28, 2010

Dealers appear to have done the smart thing this morning and have squared short euro positions after the euro was slammed to its lowest point in at least a year. Fears that a notable foot-dragging exercise by Germany would catapult the Greek crisis beyond the walls of the Parthenon sank the euro. But as investors wake up to the realization that the market is already hell bent on pushing the euro lower, they are forced to cover shorts as the symmetrical risk arises that politicians will sound-off positive comments about financial aid.


Euro - Speaking in Tokyo EU President Von Rumpuy said that a summit would be called before May 10 specifically to address the plight of Greece. He noted that negotiations were ongoing, well on track and that there was no question of restructuring debt. On Tuesday ratings agent S&P roiled the market by ejecting Greek debt to junk status and warned that if the country missed interest payments and restructured its maturity dates investors might lose 70 cents on the dollar. And with Germany apparently leaving the Greeks out to dry ahead of regional elections investors jumped to the logical conclusion that a default by Greece could mean no assistance for other members such as Portugal in the future.

The euro has rebounded from a low at $1.3142 by more than a cent to $1.3254 as investors await words from Chancellor Merkel. The heads of the IMF and ECB have today briefed German lawmakers on a Greek financial package in hopes of persuading them of the gravity of failure to ratify the much-needed assistance. Given that downgrades can't occur daily and given the push lower in the euro many speculators are left wondering whether this is the capitulation for the euro. Is it possible the skies can't get darken any further at this point?

U.S. Dollar - All eyes will be on the FOMC statement at 2:15 ET today to see if the policy committee has any insight into shifting mortgage assets off the bank's balance sheet. It's unlikely that the Fed will follow the Bank of Canada's lead in stepping towards an exit from ultra-low policy and will maintain its accommodative language. The dollar index rose yesterday to a fresh high for this year's move as dealers sold anything in order to feel safer in the world of the greenback. This morning some of that fear is eroding as investors recognize that such mighty catalysts as a country downgrade don't pop-up each day.

Japanese yen -Tuesday's stock market meltdown in the North American time zone lifted the yen across the spectrum, while stock markets are only now playing catch-up. And so the yen has reversed course against several partners and is lower at ¥93.96 per dollar. It is also weaker per euro at ¥124.25 and against the pound at ¥142.89. Against a robust Aussie dollar and ahead of market closure on Thursday the yen slipped to ¥86.65. Domestic investors sold the yen ahead of Golden Week with domestic Toshin funds set to be issued soon. Such funds aim to invest in overseas assets with higher yield and hold an appeal for retail investors trapped by zero yields.

Aussie dollar - Following on from Tuesday's fastest increase in a year for producer prices, Wednesday's data revealed a greater than expected jump in the pace of consumer price increases. The first quarter consumer price reading came in at 0.9%, which annualizes at a 2.9% pace of change. The data lifted the prospects of a further quarter point interest rate increase at next week's RBA meeting. The Aussie dollar rebounded sharply from Tuesday's drubbing and stands at 92.27 U.S. cents this morning.

Canadian dollar - In testimony yesterday to the House of Commons finance committee, the Bank of Canada Governor said that the dropping of its conditional commitment to maintaining low interest rates through June did represent a pre-ordained monetary tightening. However, there was nothing pre-ordained beyond June where data for growth and inflation would dominate the decision-making. The local dollar was heavily embroiled in Tuesday's run on risk aversion reaching its lowest point in a week. Today the loonie has picked up to 98.91 U.S. cents. The Governor cited the persistent strength of the currency as the primary risk to the path for growth. The probable difference between today and several months ago in the behavior of the currency is that genuine underlying resource demand not to mention demand for Canadian denominated assets has usurped the crown from speculators playing the emerging commodity currency theme. Canada is set to be the first G7 nation to lift interest rates after the financial meltdown.

British pound - The pound has recently been getting away likely with the rising prospect of a stalemate after the election next week and had recovered much of the ground it's given against the dollar over the past three months. A Bloomberg television interview with former Bank of England policymaker Tim Besley helped sour the tone today. He pointed out that the recovery indeed remains fragile and needs to show further signs of traction before the cat's in the bag. The pound slipped to $1.5145 before a recovery to $1.5211. Sentiment was further harmed by a study from the Britain's fiscal institute (IFS) who said that each of the three political parties had failed to outline deficit cutting plans sufficiently. Although some spending cuts had been flagged, these are unpopular and will likely weigh heavily on the growth profile. The pound eased to 87 pence to the single European unit today.

Andrew Wilkinson

Senior Market Analyst