Today’s FX View from IB:
Early forex trading was shaped by a pair of events, neither of which is ultimately likely to remain forceful later in the day. The stepping down of Japanese Finance Minister, Hirohisa Fujii, is one of those events feared more during its formation than in its aftermath. Mounting speculation had surrounded the tenure of the 78-year old minister after he asked permission to resign due to ailing health. The dollar surged on the news rising to ¥92.50 owing to speculation that the drive towards fiscal austerity ushered in by Mr. Fujii may be sunk with the wrong successor. However, the swift appointment of Deputy Prime Minister Naoto Kan should help reinforce the prospect of no change to fiscal policy. The second event is a rehash of the saga surrounding the public deficit of Greece, but this is largely in the market’s paranoid mind if you follow the paper trail of facts.
Euro – The Greek Finance Minister George Papaconstantinou was left applying a band aid to wounds opened up by ECB member Juergen Stark who stated that it was markets that were deluding themselves if they believed fellow Eurozone members would bail out Greek’s wayward public finances. It’s important to make the point here that Mr. Stark’s comments were aimed not at the Greek government but at market participants. I also doubt his comments were aimed at undermining the euro in the sense that there is insufficient sovereign risk premium priced into the euro. He did, however, manage to trip the euro up causing trigger-happy sellers to force it as low as $1.4284.
For his part Mr. Papaconstantinou sounded more philosophical telling Bloomberg television that not only was he blissfully aware of the EU charters, but also that his government has recently put into place measures to accelerate the return to permitted deficit limits for Greek finances. All in all, this Greek tragedy is little more than a storm in a teacup today. Mr. Stark’s comment to Italy’s Il Sole 24 Ore newspaper is possibly intended to spur Greek officials to ensure its report and plan to Brussels before the end of January is water tight.
In other Eurozone news today, its services PMI data came in at 53.6 for December after 53.0 in November, while monthly producer prices rose at 0.1% to show annual disinflation at a 4.4% pace through the year to November. An October reading for new industrial orders saw demand fall faster but given the lag of the data it’s unlikely to add a fresh negative slant to the euro.
U.S. dollar – The dollar index is up with the greenback advancing against the euro, yen and pound this morning. The tricky thing for dollar traders to get their heads around heading into the first day of three in which important labor market data is reported, is whether labor market growth is likely to prove robust enough to change minds at the Fed. The huge rise in bond yields during four grueling weeks for fixed income markets has baked in a rise in official rates that is far from assured. Wrestling with today’s private sector ADP employment report followed by what’s likely to be an eighth-straight week of sub-half million initial claims tomorrow will be fun. That’s before the official non-farm payroll report due Friday.
Aussie dollar – Trading on late Tuesday saw the Aussie wrestle with a three-week high at 91.75 U.S. cents. It’s also at a two-year high against the euro. Positive data in the form of a strong 5.9% jump in building approvals was also bolstered by an increase in non-residential investment with government spending on hospitals coming up trumps. U.S. auto sales data for December was also supportive for the global demand outlook and again this helps buoy the Aussie currency. Metals prices continue to stretch skyward with copper trading higher for 10 days straight. Shanghai aluminum futures were locked limit up with a 5% gain earlier.
Canadian dollar – With cold weather gripping the globe, it seems traders are in no rush to unleash long positions in the energy market. Although slightly lower in price today, crude oil remains at a three-month high at $81.56 per barrel. Gold is also up this morning despite a broadly stronger U.S. dollar. The Canadian dollar is feeling the benefit of being commodity sensitive and has risen once again to buy 96.38 U.S. cents.
British pound – The pound is once again fading against a slightly firmer U.S. dollar today with traders continuing to pore over the same litany of woes facing the currency. One wonders how low the pound must go before investors find the low growth, ailing fiscal deficit and rising political risk combination one that is baked into expectations. For now the pound must live with the baggage it has accumulated and is hardly overvalued against the dollar in the big picture at $1.5975.
Data today suggests perhaps a moribund year for the housing market after the Nationwide building society reported its consumer confidence index, showing a December decline to 69 from 74 for the sharpest reversal in over a year. Nevertheless the CIPS/ Markit service sector business activity index rose slightly to read 56.8 in December, once again confirming expansion for the sector. Against the euro, the pound is trading steadily at 89.80 pence.
Japanese yen – The yen lost ground to the dollar falling from ¥91.73 to stand at ¥92.43 by 7:30am ET while it also weakened to the euro at ¥132.61.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.