Friday FX Brief: Another Fine Mess

by: Interactive Brokers

Watching the cumbersome breakdown of the euro so far this year reminds me of the classic Laurel and Hardy double-act. It’s hard to know which one best represents the euro and which one the U.S. dollar, yet the clown-like performance of the euro as it falls from a high window, takes a slap in the face or gets run over by a truck has played out as if it was performed by the classic duo. Strangely, the culmination appeared to be the recent so-called “flash-crash” when stocks slumped on account of euro weakness. But Thursday’s stock-drop was accompanied by a sharp recovery for the single currency. Sitting with his back to Wall Street’s ticker tape reflecting on Thursday’s slide, you can almost hear Oliver Hardy telling his partner, “That’s another fine mess you’ve gotten us into.”

Euro – The euro is making further headway this morning in what can best be described as a skittish market. Chatter about central bank intervention has been making the rounds and keeping the fire lit beneath the seats of increasingly apprehensive short-players. Another meeting of EU finance ministers is scheduled for today with leaders trying to hash out a lasting fix for the debt crisis. Germany’s minister will set out a nine-point plan detailing provisions that will prevent a re-run of the debacle set off by the magnitude of the budget deficit facing Greece. The market continues to run on vapor fumes and the euro has ignored an earlier dip in Eurozone consumer confidence now that both of Germany’s upper and lower houses have approved loans to indebted neighbors. The euro is striding higher to $1.2571 and is back to ¥112.62.

Japanese yen –The Japanese yen surged in Thursday’s trading as investor demand for safe havens boosted the yen right across the board. At ¥89.50 the yen still looks firm and is off Thursday’s strongest reading at ¥89.00. Earlier, Finance Minister Kan fanned intervention flames when he noted that the volatility in the rate of exchange was undesirable. We’ll believe it when we see it.

Aussie dollar – Talking of idle gossip, I’m shocked to hear that investors are discussing the prospects of RBA intervention to shore up the Aussie unit, which has been hammered this week to a low-water mark at 80.72 U.S. cents. It hardly seems like yesterday that the central bank was whining about a strong local dollar and the potential threat from speculative purchases at a time when the recovery was just beginning. My, how the world has changed! In the meantime the Aussie has traded up to above 93.00 cents as global activity firmed, yet today the Aussie buys a mere 82.17 cents.

British pound – The better performance of the euro has allowed the pound to breathe easier today. A healthy 6% jump in first quarter business investment has helped sentiment although the same can’t be said for broad money growth. The wide M4 measure of money supply was unchanged through April leaving the annual pace of expansion higher by 3.3%. Mortgage approvals also eased to 47,000 for the month and undershot expectations for 54,000 loans. The pound rose by a half cent to stand at $1.4380 although it eased to 87.22 pence against the single currency.

U.S. Dollar – The dollar index is down 0.4% as risk aversion wanes. The dollar remains lower across the board and curiously remains lower even against the yen. Not quite sure what that tells us although the pre-market equity index futures trading indicates yet another slide.

Canadian dollar – The Canadian dollar is also under pressure somewhat to end the week and buys 93.47 U.S. cents. The Bank of Canada was given some indecisive data to digest in the form of consumer prices. For April its core inflation reading increased 0.3% for a 1.9% annual change.