FX VIEW

Today’s FX View from IB:

Several nations have unfinished housework before investors can make further informed assumptions over future currency direction. That’s the message stemming from the world’s largest and most furiously traded market this morning. Hawkish comments from a Fed messenger boosted the dollar although are likely to cause conflicting rebuttals. The ongoing discussions to get the Greek house looking tidier is keeping euro sellers busy, while Britons are growing more alarmed at who is best cut out to do the nation’s dirty laundry after the summer election. It’s central bank meeting time for the commodity units with investors wondering whether the RBA’s raise in interest rates today concludes its housework, while Canadians are wondering whether the same process is soon to get underway in earnest.

U.S. Dollar – I wonder whether the fact that Philadelphia Fed President Charles Plosser doesn’t get to vote on the FOMC throughout 2010 makes him more provocative than if he did vote. His comments to the Wall Street Journal carried today sound pretty hawkish and argue for a closer end to low interest rates. He says the Fed should back-off its “extended period” positioning and notes, “I don’t like that language. It ties our hands, or people believe that it ties our hands.”

The dollar surged in value against the euro to $1.3425, triggering plenty of stops at the recent $1.3450 low. However, this exercise has flushed the system of more weak longs and the euro has subsequently rebounded, unable to follow through to the downside. The euro subsequently rose to $1.3572 and now stands at $1.3554 – more than a cent above its overnight low.

Euro – So much is already known about the woes of Athens that one has to expect at some point the market will overcome its bearish attitude along the way. Typically when markets turn, it occurs at the moment of maximum bearishness when there are no sellers left because everyone is already short. We keep witnessing the type of sharp rebound for the euro as empty pockets of resistance get burst as shorts scramble to exit.

For now the euro remains hampered by the remaining housework that has to be completed before it can recover. Over the weekend EU Monetary Commissioner Ollie Rehn laid the groundwork for further austerity measures that must be rapidly implemented “in the coming days.” Failure to do so will render meaningless Friday’s trip to Berlin where Greek Prime Minister George Papandreou will meet his German counterpart, Angela Merkel. A lack of progress with his domestic chores will dishearten Ms. Merkel who is struggling to justify what is increasingly being seen as a handout to the people of Greece who have become permanently adjusted to living with an expensive safety net providing living standards far beyond their means.

Ms. Merkel’s discussions with Mr. Papandreou are hinged around rapid-fire progress on the domestic front. According to unnamed German lawmakers, a package of up to €25 billion awaits Greece via state-owned German lenders in the event it is needed to shore up debt issuance by Greece.

Greece faces a weakening economy and is hindered by the additional burden of rising interest rates to fund its debt. The domestic fracas is also creating stiff public opposition with another union calling for a national strike to coincide with the March 16 deadline for submitting further plans to the EU. At this point the government retains widespread public support for its austerity measures but aggressive pressure or an acceleration of demands from EU members could turn the plebiscite hostile.

The EU has spelled out to Athens that it could introduce fuel and alcohol levies as well as a sales tax and include a luxury tax on sales of expensive cars and yachts. Greece also has a so-called “14th wage,” which provides two additional payments during the year giving workers an additional one month’s wage.

British pound – The pound has now weakened for six days straight against the dollar. Another opinion poll released on Monday showed the narrowest lead for the opposition Conservative party in two years as Britons are apparently shrinking from an austere Conservative mandate aimed at reducing public debt. The public is apparently thinking twice about who is best suited to tackle the mammoth debt burden. The pound has now rebounded from weakness to $1.4855 and so held Monday’s lowest point in 10 months at $1.4782 and currently stands at $1.4960.

Aussie dollar – The RBA officially raised its short term benchmark interest rate to 4% stating that inflation would be consistent with its target. That suggests that rates could now be on hold and as such dulled investor appetite for the currency. It initially fell in response to the news, but has later rebounded against a weaker U.S. dollar today and currently stands at 90.53 U.S. cents.

Governor Stevens also maintains that most borrowers still face lower than average lending costs at this point and also acknowledged that the economy has thus far benefitted from a firm domestic currency in the shape of weaker than otherwise inflationary pressures. Evidence that previous moves on rates is working comes today in the form of a 7% decline in building permits for January after applications to build or renovate new houses or apartments slowed.

Canadian dollar – The Bank of Canada left interest rates unchanged at 0.25% this morning as it announced its monetary policy decision. However, there is growing speculation that Governor Carney might begin to sound off about prospects for raising rates later during 2010. The core rate of inflation rose last month to the Bank’s 2% target, although the headline rate was a fraction more subdued at 1.9%. But fourth quarter annualized growth data revealed yesterday of 5% spanked the daylights out of an official 3.3% projection. The Canadian dollar surged after the BoC described recent growth as “vigorous” sending the dollar to 96.93 U.S. cents.

Japanese yen – Buoyant global stock markets continue to contain investor appetite for the yen, which is weaker at ¥89.14 against the dollar. The euro also strengthened back above ¥121.00.