Thursday June 3, 2010

It's a risk-on kind of day as stocks around the world recover edging further towards a view that behind the shade of European financial turmoil, a budding recovery continues to build a head of steam. The Japanese yen weakened again overnight while perceived riskier holdings such as the Australian dollar made headway. Days of panic-stricken selling across a variety of asset classes have crumbled into a simple solitary thought from investors as they ask demand: Show me the damage?

U.S. Dollar - The greenback has been very much in favor of late and not simply due to its safe haven status. Rather the economy has been rejuvenated by the authorities' joint monetary and fiscal efforts. The dollar has been investors' natural choice given heightened fears over European turmoil as well as steadily improving data. Pending home sales data released earlier in the week argue that confidence in the housing market continues to improve.

The current emphasis now shifts to various labor market reports. The ADP jobs report came in a little short of expectations as it indicated private employers added 55,000 roles in May. Initial claims data showed a further decline of 10,000 insurance claimants - a step in the right direction - while investors must await a further 24 hours for the main event in the form of the official government employment report. Crisis aside, the U.S. economy is following the lead of other emerging markets as it returns to health.

Japanese yen -The yen stayed under all round pressure as the political situation remained inevitably in flux following the Prime Minister's midweek resignation. Against the dollar it slipped to a two-week low at ¥92.73 while against a recovering euro it eased to ¥114.15. Finance Minster Naoto Kan appears to be the forerunner for securing office and investors continue to treat the yen with kid gloves on the view that he favors currency weakness. Media reports also emphasize that Mr. Kan has recently taken to heart the future problems facing Japan in the form of its massive budget deficit, which stands at twice the value of the nation's output. It appears he grasps the extent of the turmoil facing Europe and realizes that Japan is fortunate not to be reliant on international creditors. Reports indicate that Mr. Kan sees the need for firm limits to be put in place on Japanese debt issuance coupled with more spending cuts.

Euro - The euro has faded from an overnight peak against the dollar at $1.2367 although currently remains in the black at $1.2245. It was earlier buoyed by the rising tide of returning risk appetite in line with gains for traditional riskier currency bets.

British pound - A Nationwide housing survey showed that U.K. home prices rose by 0.5% during May leaving housing 9.8% higher in price than a year ago. Further evidence of the current sustained pace of recovery was also apparent in the service sector PMI survey, which maintained its expansion throughout last month. Investors warmed further to the British pound sending it to $1.4743 as investors sanctioned the expansion through a stock market rally.

Aussie dollar - As investors pondered the state of global risk they quickly determined that still-recovering economic data was a plus for the Aussie dollar and sent it to an intraday peak at 85.25 U.S. cents meaning it's risen 2.5 cents from its weekly low already. Trade data for April showed strong exports of iron ore and coal leading to a trade surplus of A$134 million. While this data is a little out-of-date it is further evidence arguing against the impact of the European sovereign debt crisis. The risk of course as ever is the assessment of rear-view data versus forward-looking expectations. Discounting forward events is often the crux of a market meltdown.

Canadian dollar - The Canadian dollar is currently a smidge higher on the day at 96.32 U.S. cents having rebounded from unchanged following the U.S. initial claims data. The Canadian market is equally braced for its national employment report on Friday. Ongoing robust health may lead to further interest rate increases from the central bank, but they already pinned such further moves squarely on the shoulders of risks from Eurozone fallout.

Andrew Wilkinson Senior Market Analyst