The single currency has found its wings following inflationary
concerns expressed by two ECB members in what may yet become a rerun
of the monetary tightening fears surrounding the U.S. in the fourth
quarter. The return to a focus on economic fundamentals is a boon for
the euro as ECB President Trichet deflects the burning sovereign debt
issue, warning implicitly that interest rate medicine might yet be on
the agenda sometime in 2011. The shift in emphasis from indebtedness
to inflation is a clever and well-timed ploy.
*Euro –* The euro rose this week by the most in two years driven by
the threat of inflation. At the same time Mr. Trichet has tossed the
ball back into the court of European politicians with a message that
they should speed up the reengineering process surrounding the scope
of the bailout package. The euro rallied to its best level against the
dollar since December 14 and reached $1.3457. Subsequently the single
currency has pared gains and settled back to $1.3346 ahead of a raft
of U.S. data. Mr. Trichet yesterday said that the ECB had "never
pre-committed not to move interest rates," and has caused investors
to suddenly fast-forward expectations of monetary tightening into this
year rather than next. *U.S. Dollar –* Investors face consumer price
data on Friday, which could present a challenge for the dollar given
the tame nature of the series. Expectations for the December reading
shoot up to 0.4% today, which in light of changing expectations for
what the ECB might do could challenge the dollar later. Also on the
agenda is retail sales data for December where analysts are looking
for an unchanged 0.8% increase on the month. The dollar index has
rebounded this morning to stand at 79.27 as the dollar makes gains
against commodity dollars, the euro and the yen.
*Aussie dollar –* Thursday might have been a better day for the
Aussie unit, but two pieces of Chinese news helped wreck a two-day
rally. The Aussie trades towards its session low in New York buying
98.65 U.S. cents although above its worst point of 98.04 in ongoing
response to the Queensland flooding. Overnight the Peoples Bank of
China announced a further 50 basis point increase in the amount of
capital banks need to hold by lifting the reserve ratio requirement
across the nation's lenders. The ongoing move should help to dampen
bankers' ability to lend. In the China Securities Journal it was
suggested that the authorities are considering fresh price control
measures. Right now, Australia is looking inbound at the devastation
caused by its floods. Economists are struggling to estimate the impact
on growth from the catastrophe but it's safe to say that the
export-reliant nation needs restriction in overseas demand from its
number one market like it needs a hole in its head.
*British pound –* The pound is little changed but trades marginally
higher buying $1.5853 to end a week in which it rallied from a low
point of $1.5475. The pound remained buoyant following some fairly
ugly producer price data, which fits pretty well into the increasingly
bearish picture exerting itself on trading patterns. If anything the
data supports the call from some corners for the central bank to lift
interest rates, yet on the other hand the data series is more volatile
and certainly more elevated than consumer prices, which admittedly
have remained above target and stickily so for the past nine months.
The pound should remain supported by losses across the short sterling
strip as more investors sense that borrowing costs and therefore the
reward for holding the pound stays firm. The euro lost out to the
pound and buys slightly less pennies at 84.26.
*Canadian dollar –* The challenge to risk this morning has caused a
ditching of Canadian positions sending the local dollar down from
$1.0110 U.S. cents to $1.0025 ahead of U.S. data. Equity indices
around the world fell following a weakening in the U.S. initial claims
for unemployment series. The sudden emphasis on inflation has served
to undermine risk appetite and has investors worried over monetary
tightening, which could dent growth. This is one of those hazardous
speed bumps that investors have to deal with is the boost to yield
from rising interest rates while simultaneously having to worry about
the knock-on impact on growth.
*Japanese yen –* The dollar is facing a hard time recapturing
¥83.00 against the yen although it is higher on the day. Demand for
the yen remains firm in an increasingly hazardous economic landscape.
Source: Fxstreet.com
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