Monday, November 26, 2012

Monday FX Brief: Euro Fights Back on Rising Risk-Aversion

Investors began the week by hoisting a variety of red-warning flags bringing risk aversion to the fore after a string of positive data left them embracing global recovery. Fears of overheating in Asia are proving to be a remedy for rising local dollars. More bullet-dodging across the Eurozone is expected as a variety of less-than-core governments auction bonds set against a deteriorating background. A surge in consumption in Australia is second-tier news against a foreground of worsening flooding. Meanwhile investors are starting to sense that the Bank of England has a worsening policy dilemma ahead.

U.S. Dollar – Asian investors looked back at a string of gains against the dollar based upon growing confidence that a regional recovery was drawing demand for local assets. In the cold light of day, they are now concerned that the remedy for growth will likely come from sweeping monetary tightening across the region. And while that’s typically a currency positive as yield differentials widen out, the unpleasant process of living through the period of atonement inevitably comes first. The dollar index is off its intraday peak at 81.31, propelling it to a six-week high. The index remains higher and trades at 81.40.

Euro – Portugal, Italy and Spain will attempt to issue about €33 billion in debt this week set against a background of increasing nervousness that rising yields won’t be enough to attract a sufficient number of buyers to the patch. The cost of insuring against default in some cases has already risen to a record level. The euro has nevertheless rebounded from its session lows at $1.2873 according to Interactive Brokers data and trades at $1.2925. Earlier data showing a strong rebound during November for French industrial and manufacturing output was largely overlooked in the face of a weakening bond market in which yields were once again climbing on investors’ fears over sovereign credit-worthiness.

Japanese yen – In light of the growing risk aversion investors are trying to fathom the direction of the dollar-yen pair. Should they buy the dollar or the yen as a harbor of rest as they prepare for turbulent seas? In European trading the dollar was higher and reached ¥83.28 before the yen strengthened in to the New York opening where the pair trades at ¥83.05. Tokyo is closed for a holiday.

British pound – The Bank of England meets later in the week to discuss any changes it thinks fit for monetary policy. With stringent budgetary measures put together as part of the government coalition’s inaugural emergency budget in late summer kicking-in at the start of 2011, policy-makers expect to see slower growth as a result. If only they could expect the same for inflation, which has remained above the 3% target ceiling for nine months now, pressure on them might ease. Over the weekend the Prime Minister David Cameron sounded sympathetic describing the MPC’s challenge as “an extremely difficult task,” but noted that the problem was “concerning.” The pound weakened as another layer of reality was served up for the housing market in the form of the Halifax house price index, which slipped by three-times the forecast to leave average home values lower by 1.3% for the final month of the year. In the three months to the end of the year home prices were 1.6% lower than one year ago. The pound slipped to a session low at $1.5475 before rallying a half cent. The euro also recovered against a dip to its lowest since mid-September against the British pound and currently buys 83.23 pence.

Aussie dollar – The disastrous flooding devastating Queensland worsened as more rain fell, keeping investors turning their noses up over the Aussie. A strong November reading for retail sales seems as old as the coal itself that Queensland is famous for mining. The report showed a rebound from the earlier weakness that instilled optimism from the central bank last month over a cooling economy. Sales rebounded 0.3% and in-line with forecasts while the October data was revised up to a smaller decline of 0.8% at the time. Attempts at recovery in the local dollar continued to meet resistance until the unit turned south and reached a session low in Europe at 98.98 U.S. cents.

Canadian dollar – The Canadian currency has lost some of its recent gains at the outset of trading on Monday. The unit was doing remarkably well in light of improving U.S. data recently. Some say it has more to gain from a U.S. recovery than does the greenback. Today the loonie was tripped up by worsening appetite for risk and slipped to $1.0017 U.S. cents. It appears that some Canadian dollar sales were likely triggered by stop-loss selling given the spike evident on the charts and the unit has subsequently recovered to $1.0041 cents.

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