TOUCHE!

By Andrew Wilkinson at IB:

Unfortunately my poor translation means I have no idea what the Greek is for touché, but after Wall Street’s sell off on Thursday, I think I can say we certainly felt it. The vicious loop-effect of the Greek fiscal mess, indirectly rooted in a U.S. financial meltdown, yielded a massive slap in the face of U.S. markets after officials around the world failed to provide any words of solace indicating that free-falling financial markets were anywhere near under control. The ensuing carnage led to obscene currency movements leaving bonds prices bid and sending stocks way off the radar screen altogether.

Euro – My Monday morning observation about a potential decline for the euro to $1.2500 was not intended to be a target for this week, but the ensuing chaos spawned from an ECB press conference void of fresh measures to recognize an acceleration of fiscal worries brought the euro to $1.2521 at its lowest point. Similarly, I noted yesterday that technical weakness in euro/yen at a 14-month low opened the window from ¥118.86 to ¥112.12. But I never dreamt it would achieve and surpass that objective within just hours. The yen surged to ¥110.70 on Thursday as fear gripped the market.

It’s hard to know what to write about the euro today. The lower German parliament has passed the Greek bailout plan. The Greek parliament approved the plan on Thursday. Now the upper German parliament must unlock the coffers to allow the cash to flow to the central bank in Athens. That decision could come today. A G7 conference call will possibly be held today according to Japanese officials, which would allow global finance ministers the chance to update investors on attitudes to Greece.

The EU will meet in Brussels from 5pm local time and intends to give a 10pm press conference, which would still come after the close of U.S. markets. But it may quell weekend speculation somewhat. The euro rebounded from its lows and stands at $1.2712 after the U.S. non-farm payroll but notched up an earlier peak at $1.2798. Against the yen the euro recovered sharply and trades now at ¥117.67.

U.S. Dollar – The dollar index gave back some of yesterday’s gains, but that’s hardly surprising given the magnitude of its surge. The U.S. employment rate rose to 9.9% but the massive 290,000 gain in payrolls was exactly 100,000 more jobs than forecast and is an unambiguously bullish reading for the health of the U.S. economy. The report helped push the dollar stronger against the euro to $1.2696 and after a decline against the yen on Thursday from ¥93 to ¥88 (yes, you read that right), the dollar is back to ¥92.41.

Aussie dollar – The Aussie dollar’s weekly range measures a peak on Monday of 92.75 U.S. cents down to 87.10 cents as the hammer-like movement down put the growth-sensitive Aussie unit under a severe stress test. The unit has rebounded overnight to stand at 88.57 cents.

Canadian dollar – The rebound in U.S. employment was foreshadowed by a similar surge in Canadian payrolls. This morning’s labor report saw the creation of more than four-times the expected 25,000 with a gain of 108,700 new jobs. It’s hardly a surprise to learn that the Canadian dollar was revived as investors jumped on the news to cover shorts and establish bullish positions after this week’s slide to 92.93 U.S. cents. The loonie is currently trading at 96.35 cents.

British pound – The British election failed to provide a majority government and while not a surprise, the situation has left a rather large void in the country. Many last-minute voters were left locked outside polling stations after long lines had formed and no one thought to extend voting hours. But the fact that the election had such a large turnout and that there was a last-minute desire to vote indicates that change in the country is needed.

The pound has fallen thanks to the increased uncertainty and no one dare stand up and declare that they could possibly form a government. The Conservatives need more than the help of the Liberal Democrats at this point from where it appears an olive branch has been issued. Last week the Conservatives said that the nation’s failure to deliver an outright majority would open a door to IMF rescue plans. Such a nice scare tactic may yet backfire on David Cameron whose party won the popular vote. The pound slipped to $1.4476 during Thursday’s storm while today it is hampered by the election gridlock and stands at $1.4685.

Japanese yen – The drama on Thursday accelerated leading to excessive market volatility reaching a crescendo with large purchases of Japanese yen. I have noted above the violent extent to which the yen surged. The return to some sense of normality on Friday has lead to a cautious decline in the yen, but it still appears to be on watch for a further shakedown. Ahead of the U.S. equity trading session, S&P futures are higher and the employment report has boosted confidence. There are also many stories relating to why the meltdown may have accelerated including involuntary and voluntary fund liquidations and erroneous trade inputs perhaps caused through human error.