By Andrew Wilkinson, Senior Market Analyst, IB
Japanese Finance Minister Yoshiko Noda told reporters that today’s yen appreciation to its highest since the day of concerted central bank intervention on March 18 was different this time. Earthquake and tsunami-induced panic aggravated by a nuclear disaster at the time spawned panic in the market for the yen on rumors that Japanese investors would haul home their overseas stakes en masse. Mr. Noda today stated that it was dollar weakness that was inspiring demand for the yen lifting it back below ¥80.00 per dollar.
U.S. Dollar – The dollar is at a critical juncture. Recently the dollar index slid to its weakest in three years on account of weaker economic data highlighting a likely widening of yield differentials to its detriment as other central bankers remain vigilant against the reality of rising inflation spawned by increasing commodity prices. The Fed seems to take this threat with a pinch of salt and claims that it isn’t doing its job properly if the economy isn’t generating sufficient jobs growth. Atlanta Fed Chief Lockhart predicted average monthly payroll growth of 200,000 through the end of 2011 and said that such a pace would be needed to drive employment back to pre-recession levels. The dollar’s fortunes swung following an ugly reading of initial claims, which rose through last weekend to 474,000. The data series has deteriorated recently adding weight to the cautious view that the Fed will maintain monetary stimulus beyond the conclusion of the bon purchase program in June. The dollar shot higher after the data as risk aversion fears were highlighted with the dollar index around 0.4% firmer at 73.43. The dollar made most ground of around 0.85 against the Aussie and the euro.
Euro – The Helsinki-meeting of the ECB concluded in an unchanged monetary stance and we await the later press conference. Dealers want to hear Trichet and company explain further vigilance, which is market code for further monetary tightening. At this stage of the game this is over-analyzing the plot. The central bank has plainly stated that there is another half-point to come during 2011. The sooner the better and it remains a strong possibility that June will see the next move. The euro slumped following the U.S. initial claims data. Sentiment was earlier weakened from an unexpectedly poor reading for German factory orders, which fell sharply by 4% during March. Selling seemed to accelerate on disappointment that the single currency failed to materialize on a three-year high towards $1.4950 achieved the previous day. Certainly the weakness in U.S. jobs data also appears to be shaking the entire market’s appetite for risk and it seems that traders are growing concerned that the ECB might stop in its tracks on signs of global weakness. That’s the fear, but unlikely to stop the uber-vigilant ECB.
British pound – The pound has lost precisely three cents so far this week and another quarter will see losses accelerate to a more than two-week low. Such a move could easily be on the cards given that the only thing supporting the pound recently seemed to be a weaker dollar, where sentiment appears to be fast turning. The consensus view is that the Bank of England is likely to remain stranded on its desert island surrounded by waves of inflation but unable to muster the strength to do anything about it. On Thursday the Bank left monetary policy unchanged and we’ll have to await next week’s revision to its once-a-quarter projections to learn whether or not its members are leaning more towards the S&P view that a rate-rise is imminent. There was more downbeat news for the economy Thursday in the shape of a bigger than forecast decline in the April reading of the PMI services index, which fell to 54.3 from 57.1 consistent with sharp drops in construction and manufacturing detailed earlier this week. The pound fell to a 13-month low earlier against the euro but later recovered on weakness in the single currency to stand recently in New York at 89.27 pence. Against the dollar the pound trades at $1.6460.
Japanese yen – Each central banker agreed in March that the need to prevent a panic acceleration in the Japanese unit was necessary. The Japanese often refer to the excessive volatility in the yen. Today the unit appreciated against all of its major trading partners as the dollar earlier weakened prompting demand for the yen and the Swiss franc, which was up for practically each day versus the greenback in almost two weeks. Without the typical cry of foul over excessive yen volatility, we should not expect further yen intervention at this stage. The yen rose to ¥79.57 against the greenback while it also sliced 1.6% off the euro at ¥117.51.
Canadian dollar – The twin growth-sensitive commodity dollars came in for a smacking even before the U.S. initial claims data shocked investors by its weakness. Hardest hit as the morning wore on was the Canadian unit, which slumped to its lowest in three weeks at $1.0330 U.S. cents. Investors expect payroll growth for April due for release on Friday to show an additional 20,000 jobs. However, such improvement plays second fiddle to plain old weakness in the world’s largest economy and Canada’s biggest customer. Two-day congestion on the hourly chart for the Canadian dollar appears to have triggered a bear flag, whose objective appears to have easily been met on Thursday.
Aussie dollar – The Australian dollar slid for a fourth session against the dollar with two catalysts working firmly against it. The RBA continues to look less and less likely to act again in this cycle to temper either growth or inflation. Earlier in the week it stated that consumers were behaving with extreme caution over borrowing and spending. In its March retail sales report released today the government said sales slumped by 0.5% coming in down by precisely the amount the market was looking for an increase. The theory of a widening yield in favor of the Aussie dollar is fast-disappearing up the chimney. The Chinese continue to appear more likely to act over inflation than on rampant growth grounds. Another private sector PMI services report from HSBC showed a small dip in services activity keeping the expansionary pulse barely beating. Fears continue for the activity of Australia’s export sector hampered by the outright health of its dollar. The unit slid through its weakest reading in two weeks in New York trading and last bought $1.0673 – well shy of Monday’s record $1.1011.
Senior Market Analyst