The tremendous weight of pressure thrust upon Greece this week and the resultant broad euro currency weakness has electrified market talk that a weekend intervention is a distinct possibility. The euro has rebounded alongside a strong rally for Eurozone stock markets and shares in Greek banking stocks as the market hopes to get a glimpse of whatever is inside Pandora's Box.


Euro - After the ECB monetary policy meeting Thursday at which monetary policy was left static, its President Trichet pointed out that with all of the evidence that he has, there is no chance of a Greek default. The threat of a sovereign default has left Trichet in a vacuum. He has no control of fiscal policy and has at times made conflicting comments as the admittedly fluid situation took another twist. The euro reached its lowest point of the week at $1.3282 on Thursday as the fallout ensnared Greek banks on stories that wealthy Greek individuals were shifting their assets away from home. The market this morning is fuelled by rumors that the crescendo in bearish sentiment witnessed this week is unwelcome and is at its loudest pitch, which is inviting a joint EU/IMF package over the weekend. The Greek authorities are supposed to announce Friday the terms of a debt issue on Tuesday. The euro reached $1.3418 at its best earlier this morning although has eased to $1.3393 as I write. It would be of no surprise to see further short-covering into the weekend as the rumor-mill churns out new twists on what to expect over the weekend.

U.S. Dollar - Despite a rise against the Japanese yen, the dollar index is broadly weaker this morning as investors lighten their load on the perception that the euro might strengthen should authorities act between now and Monday. One Fed Governor speaking yesterday stated that the need in the U.S. economy for near-zero interest rates was unlikely to disappear soon.

Japanese yen - Asian currencies firmed during midweek on the expectation that the Chinese will allow a strengthening in the yuan. The big beneficiary might be the Japanese currency, which is seen as a benchmark for most Asian units. However, dealers today sold the yen thinking the timeline of the story is perhaps a little too aggressive at this point. The yen gave ground back across the board falling against the dollar to ¥93.75 and to ¥125.42 against the euro. Also weighing on the unit today was the first of a series of ongoing monthly meetings between Japan's Prime Minister Hatoyama and Bank of Japan Governor Shirikawa. The schedule reminds investors that government pressure is likely to remain on the BoJ in an ongoing fight against deflation.

Aussie dollar - This week's Australian interest rate increase has helped widen the yield spread against comparable European and U.S. government debt and has reminded investors of the benefits of holding the Aussie dollar, not least of which is the current 4.25% short term yield. The Aussie made headway by rising to 93.08 U.S. cents this morning and added also against the yen to ¥87.14. The cooling off in the hopes of an upwards revaluation of the yuan spurred further Aussie gains. While the short-term picture might have harmed other Asian units, the medium-term prospect remains that a vibrant Chinese economy is beneficial to the Australian dollar.

Canadian dollar -The Canadian dollar's excursion above parity has likely come to an end in the short-term at least after labor data showed a weaker employment picture than bulls had hoped for. And while the rate of unemployment idled at 8.2% fewer overall jobs were added. Employers added 17,900 net new jobs but the red flag was hoisted as the report showed that a loss of full-time jobs was offset by the growth in part-time positions. The Canadian unit was tripped up by the report. Immediately before hand it bought $1.00 precisely only to face disappointment in the aftermath, falling to 99.35 U.S. cents.

British pound - The pound had a strong day reaching a six-week high against the dollar at $1.5391 and a seven-week peak against the euro at 87.06 per euro. It was boosted by the fastest pace of producer prices in 16 months boosted by a rise in import costs including a jump in energy prices. Year-over-year input costs faced by producers rose by 10%, while output costs were up 5% on the year. Core input costs on an annual basis rose by 3.6% and in all cases the data was beyond market expectations.

Andrew Wilkinson

Senior Market Analyst