GLOBAL OPTIMISM SINKS THE DOLLAR

Today’s FX View from IB:

One really has to wonder quite what the strategy in play by European ministers really amounts to. Last week’s show of force showed little more than political will determined to explain that Greece would not be allowed to drag down the Eurozone. And while we all expected some follow-through, at least in terms of meat on the bones to explain precisely how its support for Greece might play out, it appears that the ball has simply been tossed back in to the court of Greece. Here the pressure is on the government to clean up its act, follow-through on its promise to deliver deep cuts, outline future deeper cuts and explain away derivative transactions that allowed the nation to under report the size of its deficit some eight years ago.

Euro – Yet the strategy of acting and playing tough on behalf of the EU does seem to be paying off in one respect. Much of the negative news is out of the way and the tone of the summit has elevated its importance. Having built up record speculative bets against the euro currency, markets are finding the wait for a shoe to drop a little less comfortable day-after-day. The EU seems to have taken the initiative back from the jaws of the markets. And although any euro rally continues to feel shaky, the falls have stopped. By fronting as much as they can, the EU has made the case for remaining short somewhat more fragile than just a week ago.

An index of institutional investor and analyst sentiment released today showed a fifth consecutive monthly decline. However, the ZEW index hardly fell anywhere as much as bearish analysts had predicted. The index began its decline in September despite the rally in equity prices. However, the more recent stories emanating from Greece and China have further dented optimism in the economy and therefore dulled anticipation of equity market gains. Yet today’s report is significant in that it perhaps indicates that the depth of pessimism currently embedded in market sentiment has gone a little too far.

The euro made gains against the dollar and in mid-morning European trading reached $1.3683. Against the yen it recovered to ¥122.62, although it made a further decade-long low versus a robust Australian dollar.

U.S. Dollar – The dollar index remains above 80.0 although is lower on Tuesday as growing risk appetite around the globe has investors buying commodities and equities the world over. The big picture here is that chart-wise at least, the dollar’s recent burst of strength is tapering off as Aussie and Canadian dollars lead the charge to higher ground versus the greenback.

British pound – Although massively above the Bank of England’s target rate, January’s consumer price index running at 3.5% soothed investor nerves. The rate is boosted by the wearing off from an earlier sales tax reduction and temporarily boosts the pace of price increases. The fact that the pace of inflation wasn’t more than the forecast pace was a relief to investors who bought the pound lifting it to $1.5672. Earlier the pound breached $1.5730. Despite its rally, the firmer pound lost ground to the euro which rose to buy 87.03 pennies.

Aussie dollar – Boosted by minutes from the February meeting of the RBA today the Aussie dollar once again warmed to a better climate for risk appetite. The Aussie has held on to much of the gains rallying to 89.54 U.S. cents. Today’s rally was largely predicated on the prospect that further interest rate increases are likely in the coming months. The RBA had cited worries over contagion from the budgetary woes in Greece and the fact that China had taken pre-emptive measures to restrict domestic lending as reasons for not tapping on the monetary brakes this month. However, the Bank also revealed that moderation in the future path of inflation was contingent upon further interest rate rises.

Japanese yen – Earlier in the week Japanese data confirmed a robust fourth quarter growth rate of 1.1%. However, the data also masked the largest decline on record for the GDP deflator. And so the recent appeal from Finance Minster Kan to the lower house makes full sense. In that address he urged the Bank of Japan to cooperate in order to do more to fight deflationary waves and wants to see a 1% pace of inflation.

Canadian dollar – The Canadian dollar has rallied to a three week high against the U.S. dollar already this morning. The better tone to global risk appetite has a broadly weaker dollar boosting the appeal of commodity price. Just about all raw material prices are higher with gold leaping $34.40 to $1,113.50 per ounce and crude oil breaching $75.70 per barrel in early trade.

Source: IB