Today’s FX View from IB:
Wednesday’s forex activity was notable for two things: The dollar weakened as risk appetite accelerated sending riskier asset classes and currencies to multi-month peaks. The euro failed to join the party closing down on the day. It should, like a strong derby favorite, have taken up the early running, but we all quickly noticed how hobbled it looked resting at the back of the pack. Sure enough we find today that the questions are starting to arise about the very existence of a financial rescue package for Greece in the event it can’t roll over spring bond maturities over the next two months. Overnight developments leave us with the mental imagery of politicians in Berlin holding up traffic signs emblazoned with the words, “U-turn here for IMF building.”
Euro – We have become accustomed to hearing little substantive in the aftermath of EU ministerial meetings at which defense plans were supposedly discussed. Any press conferences or statements have been confined to merely stating facts surrounding the need for Greece to get its own house in order coupled with strong supportive words from fellow nations. However, the words yesterday from Germany’s chief finance minister telling Greece to pay a visit to the IMF if it feels the need for financial assistance is a real deviation from the previous script. It also leaves Chancellor Merkel treading a fine line between standing behind Greece and actual facing up to the nation as an opponent.
Needless to say the outcome is a reversion to ongoing fears for the euro, which slipped to around $1.3650 before rebounding to $1.3685. Headway for the single currency has suddenly become difficult to envisage. However, it has to be remembered that in the aftermath of the recent budget there was not only adequate but also ample demand for the €5 billion government bonds issued by Greece. The gradient of the uphill task facing the nation going forward evened out somewhat in the aftermath. Looking forward, IMF assistance is an option for Greece and looking beyond that the outlook might even improve. Arguably EU members won’t be dragged down by lending to Greece and may make a test case in sending the nation cap in hand to the IMF. For its part Greece is shored up by binding loans from the IMF, which could improve its credit-worthiness to future bond buyers.
For today, however, the perceived aversion to the euro was stepped up by investors as they sold it in favor of dollars, the pound and the yen.
U.S. Dollar – This morning’s dollar rebound on risk aversion fears continues to gather steam mid-morning while equity prices are contradicting the lack of risk appetite by putting in another positive performance. Weakness in the euro is the main reason behind today’s gyrations while in the big scheme of things, the dollar is currently confined to a narrow range.
British pound – Aside from a rebound in the dollar to $1.5307 the pound is holding onto recent gains. A midweek employment report showing far fewer job claimants seems to be the tonic sterling needed, while a smaller hole in the public finances was revealed today, which further boosted sentiment towards the pound. .
Japanese yen – The yen is rising alongside the dollar after an overnight story carried by the Chinese Securities Journal reportedly stated that the Peoples Bank of China banned banks from lending to unscrupulous developers who hoarded land and withheld apartments from sales in the hope that land and property prices would rise further. This story has gained traction with speculation growing that China is set to take further measures to cool its economy. The yen strengthened earlier per dollar reaching ¥89.75 before slipping to ¥90.35. Against the euro the yen appreciated to ¥123.60 from ¥124.00. Against the Australian dollar the yen rose marginally to ¥83.29.
Aussie dollar – The China story once again served to tarnish the shining Aussie dollar, which is weaker at 92.18 U.S. cents. In midweek trading the Aussie surged to 92.52 U.S. cents, while Thursday’s forewarnings of measures to slow Chinese growth have tempered the bullish export scenario.
Canadian dollar – The Canadian dollar took a further step towards parity reaching 99.30 U.S. cents in midweek trade. The currency has attracted plenty of interest as measures by the government might ensure that it’s the fastest nation to eradicate a budget deficit with its plan to do so by 2015. Signs of stronger growth and rising inflation might also spur the Bank of Canada into faster action on the monetary front causing an additional appeal from a yield perspective. But it also appears that government ministers are far more sanguine surrounding the impact of an appreciation in the Canadian dollar. Just seven months ago they raised their fists to speculators warning that currency appreciation was dashing the recovery and that it would take necessary measures to reverse the move. And while they never lived up to those promises, political leaders have recently stated that the impact on a shrinking manufacturing sector is lessening over time. Additionally, ministers are now predicting that gains in productivity would outpace the appreciation of the loonie whose strength was showing little sign of impacting the nation’s competitiveness.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.