FLURRY OF RISK AVERSION BOOSTS YEN AND DOLLAR

By Andrew Wilkinson at IB:

An early morning rally for the dollar in New York has seen the single European currency surrender gains it made following dovish remarks released in the March FOMC minutes. The euro had clawed back losses inspired by unfounded reports circulating yesterday suggesting that it was trying to unshackle itself from IMF aid carrying possibly stringent demands. And while both Greek and EU officials hinted the story was without foundation, today’s dollar strength has pushed the euro beneath Tuesday’s peak. Asian currencies also strengthened against the dollar following speculation that China might allow the Yuan to strengthen.

U.S. Dollar – Minutes from the FOMC March meeting were slightly more dovish and indicated that the Fed is in no hurry to lift rates but equally doesn’t wish to become boxed in to a timeframe by its accompanying “extended period” phrase. The dollar lost ground falling from an intraday high versus the euro at $1.3350 to above $1.3400.

In midweek trading the dollar has once again strengthened playing on the ongoing woes in the European financial markets, reaching $1.3334 before easing back to yesterday’s strong point at $1.3350.

Aussie dollar – The World Bank said that China and East Asian emerging market economies will grow by 7.6% in 2010 following a pace of growth of 4.5% in 2009. The Bank raised its forecasts in today’s semi-annual report lifting it from a previous reading of 6.4%. It noted that East Asian economies have emerged stronger from the financial crisis and could face a period of strong growth for several years.

The script could have been written by the folks over at the RBA who raised a not dissimilar discussion when they raised Australian interest rates yesterday. They distinguished the world between nations at the heart of the crisis and those who had got away unscathed. The rebound was clear in its region and left little excuse not to act on further normalizing the monetary background.

As this divide becomes crystal clear investors are growing increasingly attuned to the rally in the Aussie dollar, which today struck another all-time high against the weaker euro and an 11-week high versus the greenback. Meanwhile, the yield spread between core Eurozone government debt and that of the Australian government blew out to the highest in at least a decade at 270 basis points.

Meanwhile auto sales in Australia were the best ever for the month of March as consumers took advantage of what the RBA has referred to as below average rates of interest. The service sector, however, softened somewhat displaying a slower pace of expansion. The Aussie has bowed to some profit-taking against the dollar and stands toward the day’s low at 92.50 U.S. cents.

Canadian dollar – On Tuesday the Canadian dollar breached parity as we’ve been predicting for several months now. Today it extended the rally but has left a high water mark at 1.0022 U.S. cents. A modest amount of risk aversion has popped up this morning causing a pre-market decline in equity index futures, which has sent the U.S. dollar on an excursion higher leaving the Canadian dollar back at 99.70 cents.

Euro – The euro remains hamstrung by yesterday’s story that the IMF aid-provisions would be too onerous on the government of Greece, worried by social unrest and a run on the banking system. While this is possibly the case, it does seem fanciful at the least to think that Greek officials will turn their noses up at this offer of a back stop. The euro slipped to $1.3326 at its lowest so far this morning and has gathered its composure to stand at $1.3342.

A Eurozone PMI Services survey proved ongoing expansion with a 54.1 reading, up from 53.7 in February. Meanwhile the Composite survey revealed a slightly stronger than forecast pace of expansion at 55.9. Separately, German PMI Services data revealed a 54.9 reading for March, up from 54.7. Finally, factory orders were flat on a month-over-month basis for February in Germany, which beat an expected 0.7% contraction.

Japanese yen – The yen seems bid early this morning possibly on risk aversion appeal after having slumped to ¥94.75 versus the dollar yesterday. The U.S. unit has given back intraday strength to ¥94.00 and stands at 93.53. Today the Bank of Japan maintained both a stable monetary policy and its assessment that an export-led recovery remains intact.

British pound – The pace of expansion across the service sector of the economy eased off during March according to the latest PMI survey. Data showed an index value of 56.5 after a February index reading of 58.4 and clearly delighted sterling bears who used the opportunity to send the pound down versus both the dollar to $1.5169 and the euro, which buys 87.89 pence. Key to the path for the pound here is an understanding that although today’s data disappointed, it does still represent more than a marginal pace of expansion.