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A potentially lethal week for Europe's single currency is heading to a positive end for the unit as fears of a crash in its fortunes have lost momentum. As the biggest bond holder in Athens, the European Central Bank has a vested interest in timely and wholesome debt repayment, which is why it states that restructuring is not an option. As the U.S. strolls into a long vacation weekend, behind the scenes discussion in Europe may yet result in a softening of the hardline at the ECB and is shielding the single currency from a worse outcome.
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Euro - Dealers are tidying up positions into the weekend being forced to cover bearish bets on the euro after bearish momentum increasingly turned positive during the week. A failure to build on downside pressures that sent the euro scurrying to beneath $1.40 for the first time since March 18, left dealers cautious about making further sell orders and left the euro vulnerable to short covering. The euro rose to as high as a weekly peak at $1.4230 on Friday despite improving consumer price data from German states. Five regions saw prices decline during April and is likely to see the annual pace across Europe's largest nation slip back close to 2% inflation on an annual basis. In a further sign that the recent bout of growth may have reached its peak, consumer confidence dipped in May across the Eurozone according to an EU report. The reading of -9.8 compares to an April reading of -9.7. An index of economic confidence slipped to 105.5 from 106.1 while confidence across both industry and services also eased. Yet with further potential for at least a July interest rate increase from the ECB, the euro has a steady advantage over the dollar for now.
U.S. Dollar - Friday brings further weakness for the dollar index and is chipping away at a rise throughout May, which, if sustained would mark only the first rise for the index since November. Dealers have this week returned to selling the dollar on the view that the Fed is hemmed in to a zero-interest rate policy. Consumer spending data due for release Friday is expected to show cash-strapped consumers spent les sin April as gasoline and food prices remained elevated. A reading of home sales waiting to be completed is also expected to dip for the month as an overhang in the sector continues to leave homeowners insensitive to low interest rates. Finally, the University of Michigan's consumer confidence survey is expected to remain unchanged for May at a reading of 72.4. The dollar index slid to 75.15 for a session loss of 0.6%.
British pound - The largest rebound in consumer confidence in 18 years gave investors perhaps unwarranted reason to send the British pound to its highest in two weeks, reaching $1.6460 against the dollar. The GfK confidence index surged from -31 to -21 for May and is likely accounted for by the feel-good factors of the Royal Wedding, wonderful early summer weather and more holidays in a month than most Americans get in a year, all topped off no doubt, by a few poolside beverages. No wonder the pound surged to end the week. The report has little to do with neither any shift in underlying household finances nor an improvement in confidence that is likely to be played out in the coming months. The euro made a further in road against the pound rising 0.5% to 86.64 pence.
Canadian dollar - Caught in the middle of a broad trading range, there is fresh to drive activity in the Canadian dollar at the end of the week. Interest rate expectations continue to ease as U.S. activity supports a view of unchanged policy action from the bank of Canada. The revival in commodity prices has prevented further deterioration in the loonie, which earlier in the week reached its lowest in two months against the greenback. Even crude oil at $100 per barrel seems a prerequisite to maintain stability in the Canadian dollar, which rose marginally Friday ahead of U.S. data to buy $1.0236 U.S. cents.
Aussie dollar - Thanks to its wider yield advantage over the greenback and the low likelihood of any near-term encroachment thanks to a stable Fed, the Aussie was able to accelerate a weekly upswing to close out the week. The unit rose to buy $1.0719 U.S. cents as prices spiked in the Asian time-zone. Domestic and regional stocks rose buoyed in part by a story from New Zealand whose Finance Minister Bill English confirmed that Asian investors he'd had first-hand dealings with, were interested in diversifying away from dollar investments in to those issued by his nation. This story builds on earlier news that China is interested in bailout bonds issued by stricken Eurozone governments and helps develop the risk-on theme.
Japanese yen - It was an interesting night for news from Japan. For the first time since December 2008 nationwide consumer prices, excluding fresh food, rose on a year-over-year basis. Coincidentally that was the month the Fed last reduced its monetary policy and hasn't moved since. Nationwide prices rose by 0.6% and as such the report marks the end of deflation for the nation. However, the situation is less straight-forward given the severe constraints hurting the supply chain during April in the aftermath of earthquake and tsunami disruptions. Meanwhile a report also showed sales at large retailers slid by 1.9% year-on-year indicating that it was not a return to consumption that caused prices higher. The yen had earlier surged against the dollar rising towards its best in two weeks at ¥80.83. However, the dollar is doing its best to recover its losses following a Fitch Ratings downgrade for the outlook for Japan. Fitch warned that "Japan's sovereign credit-worthiness is under negative pressure from rising government indebtedness." The ratings agency added that Japan needs a strategy to consolidate its fiscal affairs in order to bolster public finances in the face of an aging population.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
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