• Euro Pained by Weber, IMF Concerns over Region’s Financial Health
• British Pound: How Bullish Should the Market be on High Inflation Numbers?
• Canadian Dollar Surges after the BoC Subtly Moves up Its Hawkish Time Table
• Australian Dollar Rallies as the RBA Minutes Keeps the Focus on ‘Normalizing’ Rates
Dollar Advances for a Fourth Day as the Market’s Taste for Risk Still Mixed
A mixed day for underlying investor sentiment would ultimately urge the dollar to a moderate gain through Tuesday’s active session. While there were exceptions to the greenback’s advance (USDCAD was one of the more dramatic exemptions), the Dollar Index nevertheless advanced for a fourth consecutive day. For perspective, this is the most consistent, bullish trend for the single currency in two-and-a-half weeks. And yet, the dollar cannot be used as an objective benchmark for general risk appetite. The unit is already warped by its function as a safe haven while relative interest rate speculation has added a favorable facet under the right conditions. To garner a ‘less biased’ assessment of sentiment, we can look to other recently popular gauges for optimism. From the wide world of finance, the Dow Jones Industrial Average put in for a moderate advance on the day, the yield differential on Greek government debt hit a new record and commodity currencies climbed. Ultimately, this is a general mixture of asset class-specific developments contrasted against each other. If push came to shove, investor sentiment could be judged to be little changed on the day.
However, there is a difference between the barometer of risk ending the session unchanged with few agitations and holding steady after a dense round of diametrically disparate events offsetting each other. We can safely say at the conclusions of today’s session that the markets have experienced the latter scenario. Topping the positive side of the ledger was the cumulative improvement in earnings. Coca-Cola, Johnson & Johnson, Yahoo and Apple would all best their respective numbers, adding to the palpable belief among the trading masses that business activity will contribute to the budding economic recovery. However, of particular interest was the better-than-expected earnings report from Goldman Sachs. Still under government and investor scrutiny for its alleged role in setting clients up for sub-prime losses, the $3.5 billion netted through the first quarter has softened the hearts of those interested in pure return. For an unrelated pick-me-up, there was also a spat of central bank activity that would bolster the general level of expected return from the world’s benchmark interest rates. Where the RBA minutes and BoC statement would raise the probability of nearby hikes, the Indian monetary authority would actually boost its own rate for the second time in a month.
On the other side of the coin, uncertainty continued to grind away the conviction of the strained speculative build up of the past year. Though underappreciated, China announced further steps towards cooling its overheating economy and markets. The government moved to further prevent local developers from manipulating real estate prices. Taken in conjunction with recent efforts to reduce lending and dampen speculation, it looks like the world’s best performing investment (the Chinese economy as a whole) will at least cool – if not collapse. A more pressing concern for global investors is the health of Greece. With each day, promises and policy aimed at developing a foundation for recovery for this particular economy looks more and more like a failed effort at cheerleading. And while this may still be considered deterioration of a single economy; with the market in the mindset of uncertainty, it comes closer and closer to a corrosion of sentiment itself. Finally, the IMF changed its top threat to market health from banking losses to government debt in its Global Financial Stability Report. If this in turn becomes the market’s own focus, we have a built in rationale for concern.
Euro Pained by Weber, IMF Concerns over Region’s Financial Health
Where risk appetite seems to be slowly climbing with certain asset classes and currencies, the euro – a currency whose future is fully dependent on sentiment for its health – is finding itself consistently under pressure. The connection between currency and general market condition is Greece. For this EU member to avoid a crisis that pulls the entire region and its currency down with it, investors must be comfortable enough with the risk inherent in Greece’s debt to offer financing to the sovereign at a reason rate. Otherwise, mere prohibitive cost will evolve into a emergency as recession and default become probably and concurrent threats. Adding to fears of such an outcome today, ECB member and Bundesbank head Axel Weber reportedly voiced doubt that 30 billion euros would be enough to save the struggling Mediterranean economy. Though he would later deny claims he made a realistic estimate for demand at 80 billion euros, the damage was already done. This commentary was in fact so damaging that it would eclipse the first improvement in German investor sentiment (ZEW) in seven months.
British Pound: How Bullish Should the Market be on High Inflation Numbers?
If things weren’t so complicated for the British pound, news that consumer-based inflation for the country pushed back above the Bank of England’s target zone in March would have sent interest rate expectations and the currency soaring. With the headline reading of the annual figure running at 3.4 percent and the core measure hitting 3.0 percent, there is an argument to be made that price growth is perhaps more sticky than the MPC has expected. However, there is a greater concern for trader and policy official from the general election scheduled for next month. This threat is so consuming that it is likely to sap momentum following the jobless claims and BoE minutes releases tomorrow.
Canadian Dollar Surges after the BoC Subtly Moves up Its Hawkish Time Table
Though the Bank of Canada may not have changed its benchmark lending rate or any other substantial policy measures with today’s meeting; speculation that such a hawkish shift is on the horizon certainly took off. After dropping language that allowed for the earliest hike to come with the June meeting, we can see that the market is now fully pricing in a 25 basis point rate hike for the June 1st meeting.
Australian Dollar Rallies as the RBA Minutes Keeps the Focus on ‘Normalizing’ Rates
It comes as little surprise to an already hawkish market, but the reiteration from Reserve Bank of Australia officials that they are maintaining their bias on policy nevertheless revitalizes the Aussie dollar every time. The minutes from the central bank’s last meeting deemed it a “prudent” not to delay the further adjustment of the benchmark lending rate back to a more “normal” level.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com
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