Poor Italian auction keeps euro on its toes

IB FX Brief

Tuesday August 30, 2011

The dollar is clinging on to a voracious early morning rally on Tuesday as investors consider a variety of factors. The Greek bank merger that helped spur confidence on Monday is likely to fizzle in terms of its positive impact. The ECB meanwhile continues to buy secondary Italian and Spanish debt as the Italian government finds weaker appetite for its freshly printed debentures.

U.S. Dollar – Trading volumes in American equity markets were thinner than usual on Monday as the North East recovered from the impact of hurricane Irene. The strong rally for benchmark indices is coming under scrutiny on Tuesday with pre-market index futures putting a large dent in gains of the previous session. The dollar strengthened on Tuesday as risk aversion rose with its index against a basket of major trading partners higher by -.5% at 74.03. The Federal Reserve will later today release minutes from its August meeting at which the statement was reworded to make plain that short-term interest rates would remain unchanged for two further years.     

Japanese yen – Japan’s former Finance Minister Noda was voted as the nation’s new Prime Minister on Tuesday. In New York the yen slid as the dollar jumped to as high as ¥76.91 but the greenback’s strength has more recently subsided with the yen gaining to ¥76.72. The accession of the new leader is unlikely to change economic policy at this point. Mr. Noda oversaw the latest rounds of currency intervention and is likely to ensure his successor does the same going forward.           

Euro – The euro’s Monday rally on account of the announced merger of two Greek banks faded on Tuesday after an Italian debt auction highlighted ongoing concerns over the region’s stability. The euro had earlier traded at its highest in seven weeks at $1.4550 as investors felt some relief from the Greek announcement. However, the poorly received auction and ongoing concerns concerning fallout from a Finnish collateral agreement with Greece served up a significant euro pullback on Tuesday. The euro’s slump drove it down to $1.4385 while it also shed 0.8% against the yen at ¥110.58.
 
British pound – The pound’s shaky fundamentals have recently failed to deter investors in search of a safe haven alternative to the euro. But as more anemic data pours out of the nation, the pound is losing its impetus. The unit soured on Tuesday against the dollar falling to $1.6279 before rebounding to a little above $1.6300. Credit lending and mortgage data admittedly in-line with market forecasts simply don’t cut the mustard for Britain in terms of spurring growth.

Aussie dollar – A couple of back-to-back sessions of gains for the equity markets helped drive the Aussie to a four-week high against the dollar.  The unit reached $1.0684 as risk appetite returned. Against the Japanese yen the Aussie is stable at ¥81.83.        

Canadian dollar – Producer prices declined in July while the current account widened in the second quarter causing the Canadian dollar to weaken against the greenback on Tuesday. The unit reversed an earlier gain to trade lower against the dollar at $1.0214 U.S. cents.    

Andrew Wilkinson                                                                   
Senior Market Analyst                                                               ibanalyst@interactivebrokers.com