Currencies Direct April 21st 2011 - 2 minute read
With US corporate results continuing to surprise on the positive side which in turn is fuelling increased risk appetite. The Dollar accordingly came under renewed pressure with investors again off-loading the Greenback to invest in equities and commodities as well as in the commodity based currencies. This latter strategy is especially attractive at present with these currencies currently offering a big pick up in yield when compared to that of the US currency. So, the Aussie reached a post-floatation high at 1.0775 and with the Dollar index hitting a 3-year low, both the Euro and Sterling touched 16-month highs at 1.4640 and 1.6517 respectively. Gold was up again and USD/CHF hit an all time low. One can argue that with ongoing developments in the Eurozone debt market and continued evidence of economic recovery in the US that the spot market has got it wrong but that would be a bit like King Canute trying to turn back the tide. Go with the flow but watch carefully for the turn in sentiment.
Back to Europe. The 2 debt offerings, from Spain and Portugal were better received than had been feared with the former successfully auctioning 10 and 13-year bonds, admittedly needing to pay a higher yield but on the positive side, garnering better coverage than at the last similar offering. Portugal also achieved its desired cash raising, via a 3 and 6-month bill sale, but in this case, not only was demand down but the yield demanded was higher than the last, pre-bail-out, rate. This doesn’t make any real sense and obviously indicates the market’s trepidation over the future path of the country’s financial well-being. With a further escalation of fears of a Greek debt restructuring as well as concern over the Irish demands for a renegotiation of the terms of its own bail out, the correlation between bond yields of the Eurozone constituent states was become fractured. Yields on 10-year bonds issued by Greece, Ireland and Portugal are respectively 15%, 10.5% and 9.3% compared to the yield on 10-year German bunds of 3.3%. If the market’s perception was that the current problems were containable then spreads of this magnitude would not exist. Numbers say more than words ever can…..
Today we are scheduled to get a breakdown of the March UK retail sales which following the sharp drop in February are expected/hoped to pick up a bit with the possibility of a small positive monthly result. A German IFO survey is also due this morning which will likely reflect current thinking of reasonably positive current trading conditions but fears for the future. Overall should be a positive backdrop for Sterling/Euro and enable a small recovery in the Pound’s current weakness.
Yesterday, the Riksbank (as expected) raised its official interest rate by 25 basis points and with confirmation that they expect inflationary pressures to pick up, are anticipated to signal a further 4 rises of 0.25% over the rest of the year. This would produce a rate of 2.75% by year-end. The Brazilian policy committee also raised rates but by less than expected, just 0.25% to give a new official rate of 12%.