IB FX View

Greek tragedy strikes Eurozone

Thursday December 17, 2009

Blood spilt on the streets of Athens bled across European equities on Thursday following the second ratings downgrade for Greece this year from Standard & Poor’s. The ratings agency also forewarned of more to come unless the Greek government conjures up some actionable measures aimed at curbing Europe’s worst budget deficit. The dollar resumed its rally in light of greater risk aversion, while also benefitting from a more upbeat assessment of economic conditions from the Federal Reserve’s open market committee. The euro fell to a three-month low to the dollar as investors continued to send Greek yields higher in the absence of convincing government words that might start the clotting process.


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Euro – It could be claimed that the euro has felt the contagion effects of the ongoing Greek crisis. While the impact of what the economy of Greece contributes to the Eurozone is relatively tiny at around 3-4%, there is still a monetary relationship between Frankfurt and Athens. The association is causing international investors concern and fans the embers of the argument that the Eurozone might fall apart at the first signs of economic crisis. However, in recent weeks the concern surrounding Austria’s fourth largest bank also adds fuel to the fire. Whether you feel that the financial crisis is over or not matters little when investors use the recent explosions as rationale for ditching the euro.

The single European currency slipped to as low as $1.4329 before regaining its poise to $1.4365 before the latest set of U.S. figures covering initial jobless claims. The euro also gave ground up against the Japanese unit to stand at ¥129.24 from ¥130.52 on Wednesday.

U.S. dollar – Strangely enough the risk aversion bid to the dollar today began immediately after the FOMC statement on Wednesday. I say this because the statement was actually more bullish in tone than was expected and addressed the improvement in the tone to the labor market, which is something chairman Bernanke dismissed out of hand when he first addressed an audience just days after the November payroll report was released. The Fed said that it was on track to end the emergency measures on account of a vast improvement in the workings of financial markets, which earlier inspired the drive to buy $175 billion of federal agency debt and $1.25 trillion of mortgage backed securities.

While the statement was recognizably more upbeat there is still a ‘but.’ The Fed said that conditions were improving but remained harnessed by constraints on consumers. Basically the Fed said that for anyone lucky enough to hold down a job, the chances of finding another one are slim, don’t count on a raise and you can say “sayonara” to equity withdrawal from your house. Until those headwinds challenging the consumer drop, we’re in for a more of the same – an extended period of low rates. However, gentle ongoing improvements in labor market data do mean that the economy is walking towards a turn in policy. Look to this morning’s latest initial claims data for further clues on how the jobs market is doing. The forecast is for a reading of 465,000 claimants after 474,000 in the previous week.

The dollar is 1% stronger to start the day with its index against a basket of currencies showing all round strength. Against the yen the dollar is back above a key level and buys ¥90.08.

Aussie dollar is one of the bigger victims today as the investors continue to sell the Aussie dollar in the expectation that the committee at the RBA might be able to put its feet on the table for an extended period of its own with interest rates perhaps back into a “normal range” at 3.75%. That prospect has caught investors unaware and leaves the Aussie once again lower today against a much firmer greenback. The Aussie has fallen to 88.59 U.S. cents today.  

Japanese yen –The Japanese unit rose overnight as the risk aversion theme became more and more evident. As noted earlier the yen ceded ground against the dollar but broadly speaking rose across the board. The pound buys ¥145.05 while the euro only buys ¥129.22 today.  

British pound – Weakened byan unexpected decline in retail sales for November, the pound reversed a big rally against the dollar today for fears over economic health. The immediate precipitous decline versus the dollar to $1.6080 hasn’t really seen a lasting rebound and traders seem to be looking at $1.60 for immediate support. The 0.3% decline for monthly sales through November means an annual improvement of a still healthy 3.1% and investors paid little attention to an upwards revision to October’s reading. Still, fate would have it that a piece of bad data would coincide with a big up day for the fortunes of the dollar.

Canadian dollar – Down, yet not out would be a good way to describe the fortunes of the Canadian dollar of late. With one foot in the world of commodity prices, while remaining hostage to the fortunes of the American economy, the loonie hasn’t suffered to any large extent recently from overt U.S. dollar strength.  A sharp  rise in the price of crude oil yesterday helps underpin the local dollar, which today is back down to 93.21 U.S. cents.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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