IB FX View

Trichet cries foul over unfair budget treatment for Eurozone

Friday February 5, 2010

The euro continues to bear the brunt of a negative tone for global risk ahead of a key U.S. employment report and earlier fell to its lowest point against the dollar in nine months. ECB President Trichet urged investors to stop fragmenting the Eurozone by tearing strips off its periphery due to the stiff fiscal challenges ahead. Although Mr. Trichet has a valid point, market fears and skepticism have grown tremendously in recent weeks creating the biggest single challenge in the decade-old history of the single European currency.    


Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

Euro – You can see Mr. Trichet’s point. As we noted in yesterday’s commentary, a collection of different states, the Eurozone is really no different in its make-up than the United States. Yet despite a 10%-plus deficit to GDP ratio, the dollar isn’t coming under the same selling pressures as the euro. Nor is the Japanese yen, which also has a similar debt burden. According to Mr. Trichet the average aggregate Eurozone nation will have about a 6% deficit to GDP for 2011. “So why pick on the euro?” urges Mr. Trichet.

Market action continues to be fear-driven. Raw data continues to play second fiddle as escalating worries spread to global equity prices on concerns that economic recovery is at risk on account of degradation of sovereign status.  Fears over too much consumer and corporate debt from a year ago have migrated to the same concern over government finances.

The euro is currently trading at $1.3693 but earlier fell as far as $1.3648. Against the yen, the euro slumped to an 11-month low earlier at ¥121.56 but has since recovered to ¥122.17. Against the pound, a current friend to the euro in the same dog-house, the euro buys 87.27 pence.

British pound – The pound took some respite on Thursday after the Bank of England turned its way toward the exit from quantitative easing. However, even if it does so there is currently a lack of conviction that it won’t need to revisit the very room it finds itself in at present. Should growth suffer a relapse, count on a return of QE. Today the pound continues to fall against a stronger U.S. dollar and was trading at $1.5688 ahead of the employment report. This is close to its weakest point since May 2009.

Aussie dollar – The Reserve Bank pointed out in its quarterly monetary and financial review that uncertainty of the fiscal capabilities of some advanced nations was a threat to growth. The RBA upgraded its growth forecast on account of strong data within China and India. The Aussie tempered yesterday’s losses having hit a four-month low at 86.39 U.S. cents and is back to unchanged ahead of U.S. labor data at 86.55 cents.   

U.S. dollar – The dollar index stands at a seven-month high displaying all-around strength against a basket of currencies after a strong bout of risk aversion on Thursday and as dealers nervously await the January non-farm payroll data. Analysts predict only the second employment gain since December 2007 and expect a gain of around 15,000 jobs.        

Japanese yen –The dollar took back almost half of the gains made by the Japanese yen, which surged on growing risk aversion on Thursday. The dollar currently buys ¥89.42.

Canadian dollar – The Canadians get to report their monthly labor performance before the Americans and today’s 43,000 employment gain once again surprised to the upside driving the rate of unemployment down by two-tenths to 8.3%. Forecasts called for a 15,000 job gain. The Canadian dollar reversed earlier losses and stands at around 93.12 U.S. cents, eagerly awaiting the comparable U.S. report.  


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.