Thursday FX Brief: Rising Risk Aversion Sees Commodity Dollars Slammed

by: Interactive Brokers

The euro remains weak but certainly off its earlier four-year low as investors try to piece together recent official comments only to conclude that the road map looks messy. European governments appear divided in their efforts to harness the financial volatility arising from the sovereign debt crisis. Periodic rallies seem to be confined to those times when consistent bad news weighing on the euro has been sufficiently digested leaving downside momentum shot. The weighty number of shorts trying to get out quickly encourages other nervous shorts to do the same thus accentuating the apparent recovery. Yet nothing appears to have changed the perception that a crisis of confidence is stil in place.

Euro – Chancellor Merkel today warned investors that she’s ready to defend the euro. Earlier Jean-Claude Juncker who heads up the EU finance ministers sounded ambivalent when he said that yesterday’s market rumor was not an urgent topic.

Midweek Germany unilaterally imposed restrictions on short sales of government debt along with bank and insurance companies shares. Today ECB member Gonzalez-Paramo told Italian journal Il Sore that anti-crisis measures need to be enacted at the EU-wide level in order to be effective.

The subsequent ease in the 16-nation euro currency has brought is back to $1.2337 on Thursday, with the half cent loss overnight likely attributable to investors’ concerns that the EU strategy remains all over the road map.

Japanese yen –The Japanese yen once again rose as financial market volatility gained. An undershoot for first quarter GDP played into the hands of yen bulls. A less vigorous pace of growth proves to be a negative factor for the outlook for global growth. The yen was already on the gain anyway with regional Asian stock markets continuing to look seasick. The yen rallied against the dollar with the rate declining to ¥90.80 with the dollar trading at a two-week low against the yen today as pre-market index selling accelerates. The Aussie also maintained its sixth day of losses against the yen making it the worst run in 16 months. The finding by an international panel that it was a North Korean manufacturer torpedo that recently sank a South Korean ship also heightened geopolitical risks leaving the Japanese unit the natural gainer in the region. Against the euro the yen rose to ¥112.00 and against the British pound it gained to ¥129.75.

Aussie dollar – As well as caving in against the yen, the Aussie dollar continued its losses against the dollar declining to 82.62 U.S. cents today. The string of bad luck for commodity prices is taking a toll on the unit along with fears for the pace of growth in China.

British pound – Despite news that retail sales continued to a three month recovery during April the pound was more affected by its current status as a risk currency. The pound remains a hostage to the euro and performs sheepishly as though it has a gun pointed squarely at its temple. Today it shed another cent-and-a-half against the dollar and buys a mere $1.4257. Yet despite its flaws the euro maintains an upper hand and edged higher against the pound to 86.44 pence.

U.S. Dollar – Initial jobless and continuing jobless claims diverged in Thursday’s session and for choice the market is responding negatively through buying the dollar, presumably as it portends risks to global growth. Admittedly the rise in initial claims to 471,000 remains a far-cry from the required break-even pace of 400,000 that would be needed to help drive additional employment growth in the economy. The dollar index has rallied 0.5% so far despite a near 1% gain for the yen per dollar.

Canadian dollar – The American dollar’s surge is pile-driving into the Canadian dollar, which is weakening pretty close to the losses incurred on “flash-crash” Thursday. The loonie is 1.8% down at 93.77 U.S. cents in the aftermath of today’s employment signal.