Wednesday FX Brief: Euro-Boost Foiled After Greek Confidence Vote

by: Interactive Brokers

An earlier in the week rally for risk that carried the euro higher on hopes that Prime Minister Papandreou would win the confidence of fellow lawmakers is proving premature. Investors now face a second hurdle as they await voting on a passage of stringent austerity measures that would cut government spending by €78 billion. Without this and several other hot-issues among the populace of Greece, the nation stands to forego the July phase of loans previously committed to by its partners. While politicians have accepted that Papandreou is the right man for the task, the slim majority, which included all of his own party, points to the difficult challenge ahead of forcing further measures upon his nation.

Euro – Speculation that Papandreou will at least struggle with safe passage of the austerity plan has held back the euro after earlier optimism over his ability to skirt a confidence vote. In the event the 12-vote margin looks pretty slim. Papandreou must now set up an agency to organize the sale of state-owned assets as part of the demands laid down by European and IMF partners who have promised further financial aid. The euro earlier dipped to $1.4351 while equity investors are showing some restraint after a two-day string of gains for stocks. The euro eased to ¥115.23 against the Japanese unit.

U.S. Dollar – The second FOMC press conference will follow the conclusion of its two-day meeting today. Governor Bernanke will address the media as the $600 billion program known as quantitative easing comes to an end and with few economists currently anticipating an expansion of the program beyond coupon reinvesting. Various Fed officials including Bernanke have, however, recently sounded disenchanted with the progress the economic recovery is making. A further strand of evidence arrived on Wednesday with a 5.9% slip in the MBA mortgage application series, which tumbled from its highest this year. The level of refinancing and purchase activity slumped during the week though Saturday according to MBA data despite the fact that mortgage rates remain near record lows. The dollar index is higher ahead of Wednesday’s conclusion to the central bankers’ gathering and stands at 74.77.

British pound – The minutes from the Bank of England’s June meeting helped send the British pound lower after the vote switched back to a 7-2 majority in favor of unchanged short-term rates. The vote against unchanged rates had been higher for several months spearheaded by Andrew Sentence whose term recently came to an end. His replacement voted for unchanged rates at his inaugural meeting while Spencer Dale, Chief Economist at the Bank maintained his call for a tighter stance in light of a pace of inflation at the highest in more than two years. However, expectations over future rate increases were dashed after the policy judged that the “current weakness in demand growth was likely to persist longer than previously thought.” The pound fell against all of its contemporaries easing to $1.6115 against the dollar and per euro to 89.29 pence.

Aussie dollar – The Aussie remains lower but has risen from its earlier lows in response to the realization that the Greek confidence vote was merely the first hurdle in the race to prevent a Greek financial crisis turning into a global problem. Last week the IMF warned European leaders that failure to take decisive action on the debt crisis risks triggering a “larger global spillover.” Weakness in regional stocks has the Aussie back in to the ‘riskier’ camp midweek although it has edged up to $1.0591 from a session low at $1.0568 U.S. cents.

Japanese yen – The yen remained range bound repeating its Tuesday performance. At one point overnight the dollar appeared more favored and sent the yen lower but a recent risk-off attitude has kept the dollar under pressure and just above ¥80.00. An index showed April all-industry activity rebounding by 1.5% after an unsurprising 6.4% decline around the time of the March earthquake. The yen advanced against an ailing British pound to ¥129.07 following the minutes from the Bank of England.

Canadian dollar – Lower stock index futures and weakness in crude oil prices put some pressure on the Canadian dollar ahead of the opening bell. The unit buys less dollars today at $1.0249 from $1.0278 at its best level on Tuesday.