Monday FX Brief: Euro Rallies as Investors Weigh the Odds

by: Interactive Brokers

Buyers pushed the euro higher spurred on by the ugly reality of what might happen should Greek lawmakers fail to vote for the austerity measures on Wednesday. Fears climaxed late Friday that the weekend might deliver a wave of political protests that would leave Prime Minister Papandreou’s efforts dead in the water and assuring the first default in the history of the Eurozone. The fortunes of the single currency appear to have turned for the better as economists attempt to step inside the minds of politicians charged with voting on their nation’s future and concluding that a vote against would be akin to national suicide.

Euro – Yet it’s not all rosy for Europe just yet. Billionaire investor George Soros warned domestic investors that, “We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread. The financial system remains extremely vulnerable.” Central to his observation is the value of the euro, which is suffering from political gamesmanship as officials attempt to buy time – something Mr. Soros points out is in short supply. With no data to drive the single currency on Monday, investors quickly dashed back in to it on account of a lack of fresh negative developments over the weekend. The euro quickly slipped to its lowest in seven sessions at $1.4103 at the start of the Asian week before rebounding to $1.4236.

U.S. Dollar – The dollar index as firm as the euro was soft in Asia and fell as risk aversion waned. The index traded to as high as 75.98 before easing to 75.43 as U.S. equity index futures shrugged off losses and looked to a brighter start to the week.

British pound – Lloyds TSB’s business barometer painted a far more optimistic picture of the domestic economy helping to lift the British pound after a slump last week. The unit rebounded from its weakest reading since January 31 at $1.5913 before gaining to $1.6009. More recently the pound remained lower on the day against the greenback at $1.5950.

Aussie dollar – The Aussie traded at its weakest level against the dollar in 11-weeks as investors mull the potential for an unwinding of at least some of the central bank’s recent tightening. In the absence of domestic data traders looked at the ailing health of the Eurozone paying heed to the recent veiled warning from the RBA who was forced to display prudence by leaving monetary policy on hold. In its accompanying policy statement the RBA said that conditions on account of Europe’s sovereign debt crisis had the potential to escalate and thereby further destabilize the global economy. The Aussie earlier fell to $1.0412 U.S. cents before steadying at $1.0433.

Japanese yen – The flipside of a rally in the euro was felt on the yen, which slid against the dollar to ¥80.88 and to its weakest in seven sessions. For now it would seem that rising risk appetite favors the dollar rather than the yen. The yen also eased per euro to ¥114.78 and per pound to ¥128.85.

Canadian dollar – The threat of a weaker greenback is receding against the Canadian unit, which rose to positive ground earlier but has since pared gains to remain in the red at $1.0088 U.S. cents. Inflation data is due Wednesday before a shortened holiday week with markets closed for Canada Day ahead of the weekend.