This morning’s FX View from IB:
In the space of an instant the fate of the single European currency has turned on a dime following the European Commission’s approval on Wednesday of the plan submitted by the government of Greece to reduce its public deficit from 12% to 3% within the next 36 months. Although it’s impossible to say that this concludes the budgetary follies dogging European recovery, today’s turn of events has possibly drawn a line in the sand as far as ending the eight weeks of weakness felt by the euro. And while we’re pretty sure we won’t have heard the last of this episode, today may be remembered as the day the albatross around the neck of the European sailor flew away. The euro broke above $1.40 against the dollar for the first time in four sessions.
Euro – Additional plans may be necessary from Athens in order to achieve its planned 3% deficit proposal, but in principle its solution was today accepted in Brussels. This takes a large deal of pressure off the euro and reduces the worries over further fiscal fallout in the region while at the same time serving to boost risk appetite. European stocks reacted positively.
But of course as we often hear it said, following today’s approval is where the hard work begins. The international media glare catching the entire Eurozone under its spotlight will focus its attention to the domestic level and scrutinize local factions from individuals, employees and employers to political organizations, raising the question over precisely how achievable is the proposed plan. Failure is an option that will crack open the fissures along what may yet become a major Eurozone fault line. For now, however, the tremors appear to be disappearing into the background. The euro added to recent gains against the pound rising to 87.67 pence and rose to ¥126.88.
Aussie dollar – The Australian dollar remains higher on the day despite an earlier report stating that two of China’s biggest banks had to call back loans made earlier in January so that they’d fall in line with lending constraints imposed by the central bank. Slowing growth in China has possible negative implications for Australia, which counts China as its number one trade relationship. Having cooled expectations for domestic interest rate rises, the picture for the Aussie has changed somewhat. Typically a high yielder seen influenced by commodity demand, the RBA raised a question-mark over further policy changes when it signaled a pause on Tuesday, leaving some investors skeptical over its prospects. The Aussie reached 88.90 U.S. cents on Wednesday and is currently trading at 88.80 cents.
U.S. dollar – Key data is due out between now and the remainder of the week. Today we’ll see the latest diffusion index data for the core service sector side of the economy. Also due Wednesday morning is the latest mass layoff reading from Challenger Gray and Christmas while soon after comes the ADP private payroll data. This report has a low correlation with the official household survey due on Friday because it doesn’t encompass government payrolls. Still, optimists expect that during January the American economy added at least 10,000 jobs. What’s unclear at this point is how this will play out for the dollar. On the one hand, a strengthening labor market would deliver great optimism for growth prospects and strengthen the conviction that yields would ultimately grind higher supporting the dollar. However, what to make of ongoing payroll declines? It’s difficult to become impatient with the dollar when the major alternative (the euro) has lost much of its attraction during the debacle surrounding the Eurozone fiscal mess. The dollar tends to rise as risk aversion steps up. If sentiment towards the euro remains positive after today’s affair, then weakness in Friday’s payroll will mark its first major test as an alternative destination to the dollar in quite some time.
Japanese yen – The first clue to how the dollar might fare post NFP is in the response to a 22,000 loss of jobs reported by ADP for January. This was 10,000 less than expected and bodes well for possible job additions from the official reading. The dollar jumped against the yen to stand at ¥90.80 immediately after the data.
British pound – What might be the impact if the bank of England announces a pause in its asset purchase program when it concludes its February monetary policy meeting on Thursday? Investors are eagerly hoping that the Bank will be brave enough to exile the quantitative measures for good, or at least until the next crisis. Recent dollar strength and lingering fears that the economy isn’t quite prepped for standing alone have recently hampered sterling, and ahead of tomorrow’s decision, traders still appear nervous.
Today the pound was buffeted in both directions as investors responded negatively to a CIPS/ Markit services sector survey, which unexpectedly declined to 54.5 in January from 56.5. The ongoing expansion continues at a marginally lesser pace according to that report. However, sterling rose on the release of a Nationwide Building Society consumer confidence index report showing that British consumers were almost twice as optimistic when compared to one year ago. Recently the pound was down to $1.5960.
Canadian dollar – The Canadian dollar has rotated lower against a stronger U.S. unit after the ADP data. Strengthening commodity prices have boosted the loonie’s recent fortunes and although today it’s falling, the Canadian dollar has moved close to 95 U.S. cents in recent sessions. Currently it is lower at 94.33.
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.