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By Andrew Wilkinson at IB:

The backlash of risk aversion continues to dominate currency trading with little let-up in the strength of the safety valves of Swiss francs, the dollar and the yen. As Japanese officials met to discuss recent events nervous traders bailed on long positions before the meetings ended without significant conclusion. A short-lived appetite for risk was quickly extinguished when investors were quick to point to potential worries over Eurozone data.

Euro – The euro fell to $1.2800 for the first time in three weeks. Its fall midweek was no worse than the fate suffered by other major currencies as the dollar suddenly found a risk aversion bid. But today the single currency is responding to a couple of data points, which euro-bears are quick to point to as evidence that its recent climb to $1.3334 was merely short-covering.

Industrial production across the Eurozone in June unexpectedly declined by 0.1% when analysts were expecting an increase of 0.6%. Data for May, however, was revised higher. The report today is a convenient excuse for arguing against the euro’s recent strong run and the data does conflict with more obvious signs that the recovery in the Eurozone was robust over the summer. Yet the tone towards the euro flipped adversely throughout the week and was evidenced by rising worries about peripheral European governments. Some observers expect the euro’s rebound to be nothing more than a “honeymoon” period likely to disappear as fast as it appeared. Some say that when the structural arguments surrounding Eurozone nations reemerge, all hell will break loose for the euro.

Hampering the euro further was a rise in the reading of unemployment for Greece reported today. The May report showed that the number of people without work rose to 12%, while the prediction was for a decline to 11.6%. Early data for second quarter GDP was also on the low-side of expectations coming in at a quarterly contraction of 1.5%. The Greek economy contracted at an annualized pace of 3.5%. And when you consider that the expected contraction was 3.4% it does seem like there is some hair-splitting going on after revisions to first quarter data.

U.S. Dollar – Still there is no masking the dollar’s current bout of strength after a sharp decline throughout Wednesday for U.S. stocks, which suffered a down-and-out session and failed to find respite from any corner. The dollar index has now rebounded by 4.6% off an index low of 80.00 last Friday. Today the dollar has jumped 0.5% against both the pound and euro and is higher at the margin against the Japanese yen. Investors continue to unravel the implications of the Fed’s recent announcement that it would reinvest maturing mortgage bond proceeds back into the bond market. The balance of opinion is clearly that the Fed is more worried and that the economy is about as likely to recover as it is to fold. Despite the massive slice the last 48-hours of trading has taken out of U.S. yields, the dollar has risen on safety grounds. Until the FOMC statement the dollar was losing ground under the weight of diminishing yields.

Japanese yen – The yen remains strong against everything with the exception of the dollar this morning. On Wednesday the yen rallied per dollar to ¥84.73 for its strongest level in 15 years as global recovery fears spread like wildfire. Today the yen continues to appreciate. Against the pound it rose to ¥133.45 and against the euro it strengthened to ¥109.46, while it also added against the Australian dollar to ¥76.43. Finance Minister Noda announced that he had no plans for a G7 conference call after meeting with government officials today. Meanwhile Bank of Japan Governor Shirakawa noted he was in observation mode and was measuring the impact of the rising yen on domestic businesses. The dollar currently buys ¥85.59 today after earlier dollar weakness was confined to just under ¥85.00 overnight.

Aussie dollar – Respite for the Aussie was confined to the hope that Japanese officials would announce more constructive intervention plans. Risk appetite rebounded briefly overnight allowing the Aussie to rebound from 89.17 U.S. cents to 90.08 cents. The Aussie was also restrained following the release of the July employment report. Despite a bigger headline gain of 23,500 new jobs analysts seemed more stressed by the net loss of 4,200 full-time positions while part-time workers took up 27,700 roles. Economists were predicting a 20,000 overall employment gain while data for June was revised to the downside. Some investors used the report to poke holes in the string of six-quarter point rate increases at the RBA suggesting that its action was too much at a time when U.S. growth was naturally coming off the boil. The Aussie recently traded at 89.38 cents.

Canadian dollar – Crude oil prices have now slumped by around 7% from around $83.00 during this week, while concerns over too fast of a slowdown for China’s economy has depressed commodity price. The upshot is a pretty poor performance by the Canadian dollar, which also reached a three-week low at 95.25 U.S. cents this morning. Apart from its exposure to the health of commodity prices, which also tend to decline when the U.S. dollar gains, the Canadian dollar also weakens when the prospects for the health of the U.S. economy deteriorate.

British pound – The British pound came with almost half a cent of losing an entire five cents within just four days as the dollar rebounded. The pound touched its weakest point of the day so far at $1.5565 on a day free of British data releases with the pound left to suffer the fate of an unwinding appeal of risk appetite. Against the euro the pound gained marginally to 82.25 pence.

Andrew Wilkinson
Senior Market Analyst