European Sovereign Woes Diminish

Continued strength in a global rally for equities was further inspired in the Eurozone lifting the Stox Europe 600 index 1.1% to its highest since September 2008. Meetings between European ministers continue delivering further confidence in the outlook for the single currency as investors anticipate a positive outcome from official efforts to strengthen the Eurozone’s safety net. The euro rose towards a five-week high propelled also by an afterglow from last week’s suggestion from the ECB that interest rate s might rise sooner rather than later on account of rising inflationary pressures.

Euro – The euro got back into its stride on Tuesday following a dull Monday when several American exchanges were closed in observation of Martin Luther King Day. The single unit rose to $1.3428 as talks continued in Brussels to help widen the bailout tool in an effort to further dampen the sovereign debt crisis. A Eurozone-wide economic confidence reading accelerated in January reaching 25.4 following a 15.5 reading in December. The same survey for Germany showed consumer confidence rose to a six-month high as the index rose to 15.4 from 4.3 at the end of December.

U.S. Dollar – The dollar basket slumped to its weakest since November as investors covered short euro positions with risk appetite once again coming back into vogue. The index is off its weakest point of the session but at 78.94 is weaker by 0.5% on the day. Comments on Monday from Philadelphia Fed President Charles Plosser indicate that he would become more comfortable with the prospect of monetary tightening if growth gained traction even if unemployment stayed high. In Tuesday’s session the Empire State manufacturing index fell short of predictions on account of a downward revision to December data. The index rose from 9.89 to 10.57 yet fell short of a forecast reading of 11.92.

Aussie dollar – The better tone to risk appetite on account of a recovery in sovereign debt prospects across the Eurozone helped the Aussie unit to recover towards parity with the dollar on Tuesday. The flood-stricken Aussie did break above par as stops were triggered in the European time zone and currently stands at 99.93 U.S. cents.

British pound – An acceleration of inflationary pressures drove the pound back up to $1.6000 for the first time since late November. The December CPI reading reflected a 3.7% year-on-year pace of change in prices and surpassed expectations of a mild one-tenth rise to 3.4% from a November reading of 3.3%. Inflation has surpassed the official target ceiling of 3% for 10 months. The market took the data as bullish for the pound with investors suggesting the Bank of England will be under significant pressure to drive a stake through the heart of accelerating price pressures before draining consumers of their lifeblood. Rising prices have the impact of eroding the value of money. The dilemma for investors is that rising prices typically signify a well-heeled recovery supported by vigorous growth capable of sustaining tighter monetary policy. In the British case GDP faces the reality of substantial spending cuts during 2011 to help overcome the ballooning budget deficit.

Canadian dollar – The central bank left monetary policy unchanged on Tuesday despite sounding mighty bullish on the recovery. It raised its growth outlook for this year to 2.4% and said growth in 2012 would strengthen to 2.8% although it would achieve its 2% inflation target. The loonie slid against the dollar despite the Bank’s observations that growth in the Eurozone was improving and that the U.S. economy would further recover on account of added fiscal and monetary stimulus. However, all said and done the local dollar quickly fell out of further when the Bank warned in its statement that on account of considerable excess capacity in the Canadian economy, “any further reduction in monetary policy stimulus would need to be carefully considered.” The Canadian dollar weakened form a session high at $1.0138 U.S. cents before the announcement to $1.0089 cents afterwards.

Japanese yen – The dollar moved lower throughout the European session to ¥82.35 for a near-two week low. The recent trend towards stronger Asian currencies was boosted after a Peoples Bank of China adviser told the 21st Century Business Herald that the domestic central bank should step up its monetary tightening process in order to ensure that it doesn’t accommodate negative real rates. China’s yuan was permitted to further strengthen ahead of an official visit to Washington by Premier Hu. Just ahead of the opening bell for U.S. stock markets the dollar has recovered to an unchanged reading against the yen at ¥82.66.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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