Friday FX Brief: Dollar Set to Close the Week With Net Gains

by: Interactive Brokers

The likelihood of a further two cent gain for the euro before the close on Friday is pretty slim although if there’s one thing we’ve learned recently it’s never say never. Last weekend the euro rebounded sharply to close at $1.2570 and failure to close above there would mean that for the first 22 weeks of 2010 the euro will have suffered 15 weekly losses. So far it’s down 6.6% for the year versus the dollar and is facing its longest losing streak since April 2000. It’s also down for a sixth-straight month. Yet a record number of short positions banking on a euro-crisis eased last week as investors show signs of tiring, And with a huge reversal in stock market sentiment as investors’ minds are refocused on growth rather than fear is it perhaps time to look for a similar reversal in the euro?

Euro – Today the single currency jumped to $1.2452 in European trading and as I write is back to $1.2385. Stock market gains on Thursday paved the way for some let up in pressure on the beleaguered unit and at present there is no sign that this is simply a one-day rally. Technically speaking the recent double-low at around $1.2150 and its subsequent rebound has set up a neat cross-up in the MACD study and at the very least leaves short positions looking perilous. Relative strength also shows room for a rebound. The question is whether investors will use any rebound to reestablish short positions. Critical for the Eurozone is whether core Europe remains free from the level of fiscal austerity that concerns investors about the fate of Greece and Portugal.

U.S. dollar – The dollar is showing a 0.8% net gain on the week on an index basis and is well off its earlier 2.3% gain when panic struck on Tuesday. Currently the greenback is higher against the pound, euro and yen heading into the weekend.

British pound – In the big scheme of things the pound looks a lot healthier than it did at the start of the week, and looks set to close with a weekly gain. At $1.4571 the unit is lower marginally on the day after a GfK NOP consumer confidence survey dipped by a small amount disappointing expectations for a static reading. May has been a hectic month for the currency with political turmoil and the sovereign debt crisis weighing heavily and allowing the pound to trade at a 13-month low. At worst the rally looks set to allow the pound breathing room to perhaps $1.50 during June based on a downtrend touching November 16 and April 27 peaks. At best MACD depicts a nice turning point higher that could also provide support for several weeks.

Aussie dollar – The Aussie dollar continues its recovery and easily held Thursday’s gains. Naturally the biggest driver came late in the week with the refutation from Chinese authorities who trashed speculation that it was set to abandon its European assets. Risk appetite immediately resumed and has helped reduce the Australian dollar’s monthly demise to 7.4%. Today the Aussie purchases 85.23 U.S. cents and it also rose to ¥77.74 against the yen. Next week the Reserve Bank is very likely to leave rates alone and it will be of interest to read what they have to say about any changing impact of the sovereign debt crisis.

Canadian dollar – The Canadian unit is looking at a weekly gain of about one cent in early Friday traffic. The rebound in commodity prices and stability in stock prices has drawn a crowd of onlookers to watch the loonie’s high-wire act. Throughout the week and as risk appetite recovered investors have slowly repositioned for next week’s Bank of Canada meeting. Several weeks ago it became apparent that the central bank was facing a far more robust economic recovery than was predicted at the start of the year. Along with activity came more inflation, which led to an abandonment of its conditional policy committing to a timeframe for low interest rates. The decision will be closely watched once again for an impact of the sovereign crisis on decision making. It remains possible that the Bank will temporarily postpone lifting rates but will make it plain that this is purely on account of fragile markets. The dollar trades currently at 95.57 U.S. cents.

Japanese yen –There was plenty of fundamental data out of Japan overnight yet it’s hard to discern whether the news is responsible for a marginally weaker yen today. The stability in the stock markets around the world argues against a stronger Japanese yen where it had hardened as investors ran for cover. So far the unit has weakened per dollar to ¥91.26 and per euro to ¥113.21. Today’s data conflicts with recent export-driven data fro the first quarter, which proved a healthy regional recovery. However, the loss of 280,000 jobs during April boosted the unemployment rate to 5.1% and was not expected. Of concern was the first rise in eight months for the job to applicant ratio, which slipped to 0.48 indicating 100 applicants for each 48 jobs posted.

Japan’s economic fortunes remains tied to export demand. Consumption domestically remains anemic and data for May showed a 0.7% decline in household spending compared to a year earlier. Falling prices deepened as consumers postpone purchases in expectation that they can buy the same item for less next month. Consumer prices excluding fresh food declined by 1.5% last month. And although the Nikkei was 1.7% higher in Tokyo today a monthly decline of 11% is clearly likely to dampen confidence and spending habits. The sovereign debt crisis has boosted demand for the yen during the month and has unwittingly exerted pressure on exporters.