The U.S. dollar winds down the week on mixed footing. The greenback pared some of its gains against the euro after hitting a new three and a half-month peak overnight. The dollar however, remains within striking distance of four-month peaks against the Aussie and New Zealand dollars, two of the hardest hit currencies in recent days. A glimmer of hope that Greek parties will be able to piece together a coalition government and avoid another round of destabilizing elections partially offset disappoint economic data from China and news that U.S. banking giant JP Morgan posted a surprise $2 billion trading loss. The overall lack of investor appetite for risk, given the increasingly uncertain macro economic backdrop should continue to keep the dollar generally well supported going forward.
The euro bounced off of a new three and a half-month low against the dollar overnight after Greek conservative leader Antonis Samaras said there was still hope of forming a coalition government. While unlikely, news of agreement among Greece’s fractured political parties would assuage some fears about another round of messy parliamentary elections. The euro however, should continue to struggle given mounting concerns about Spain’s troubled banking sector, which continues to be a massive fiscal drag on the euro zone’s fourth largest economy. While near-term volatility is all but certain, the medium-term outlook for the euro remains decidedly negative.
Soft Chinese industrial production data and news that America’s largest bank, JP Morgan incurred a shocking $2 billion trading loss hit riskier assets across the board. The Aussie and New Zealand dollars, already suffering from the generally risk-averse backdrop in global markets, slipped toward four-month lows overnight.
EUR: The euro fell to a three and a half-month low against the dollar before recouping some of its losses overnight. The single currency found some nascent support after a Greek conservative party leader said there was still hope of forming a government following last weekend’s election. While the euro bounced on the comments, it looks increasingly unlikely that Greece’s fractured parties will be able to form a coalition government and avoid another round of parliamentary elections. Investors fear that any coalition that comes into power will try to renegotiate the terms of last year’s bailout, a scenario that could delay Athens receiving aid needed to help it avoid defaulting on its debts. Outside of the Greek political drama that has captivated markets this week, Spain’s government is struggling to support its very fragile banking system that was ravaged by the implosion of that nation’s property bubble during the financial crisis. As Madrid is forced to pour more money (that it does not have) into its banking sector, its fiscal targets appear increasingly likely to be missed and investors continue to push yields on Spanish bonds dangerously higher. The euro remains vulnerable as a result of the mounting political, economic and debt-related uncertainty.
AUD: The higher yielding Aussie and New Zealand dollars fell back toward four-month lows against the greenback after China’s industrial production fell sharply in April and data showed that fixed-asset investment, a key driver of China’s growth, slowed to its lowest level in over a decade. The reports, which were partially offset by a strong reading of Chinese retail sales, suggest an accelerating slowdown in a key driver of regional growth and demand for Australian and New Zealand exports. News that JP Morgan incurred a massive loss in one of its trading operations fanned worries that other banks may be hiding losses and undermined investor risk appetite and further weighed on the fragile antipodean pair.
GBP: The British pound tracked the euro and riskier assets lower overnight after weak Chinese data and a shocking trading loss for JP Morgan undermined market sentiment. While the BOE expectedly left monetary policy unchanged at this week’s meeting, there remains a risk that mounting European headwinds could eventually drive the bank to provide more policy support for the economy, especially if upcoming readings of U.K. inflation show price pressures beginning to ease.
USD: April’s PPI fell by 0.2%(m/m), confounding expectations for a flat reading of wholesale prices. Ex-food and energy, PPI rose by 0.2%(m/m), exactly as forecast. The drop in headline PPI was largely driven by a sharp decline in energy-related products last month. The data had little impact on the dollar, which remains hemmed within its narrow overnight ranges.