By Omer Esiner of Travelex
The U.S. dollar was mostly mixed again in overnight trade, rising to nearly a two-week high against the beleaguered euro but falling to a 22-month low against the broadly stronger Canadian dollar.
Improving risk appetite overnight, which was buoyed by stellar quarterly results from
late yesterday, kept higher-yielding and riskier assets in favor and undermined some of the safe-haven appeal of the greenback and the Japanese yen. However, renewed sovereign credit concerns in the euro zone revived some market demand for traditionally defensive assets early in the North American session.
The spread between Greek and benchmark German bonds widened to record levels, while the cost of insuring Greek debt against default also hit its highest levels to date, a clear sign of investors' lack of confidence in Athens' ability to finance its deficits, despite reassurances of aid from the EU and IMF. Talks between Athens and the EU on financial aid are expected to begin today and could provide the market with new details on the deal.
The Canadian dollar rocketed to multi-year highs against most of its major rivals after the Bank of Canada yesterday signaled it could begin to lift lending rates as early as June 1. Such a scenario would make Canada the first G7 nation to begin removing monetary stimulus following the global credit crisis and highlights the relative resilience of its economy.
With no U.S. data on tap today, currencies should continue to take their direction from fluctuations in stocks, commodities and the overall level of risk appetite.
: The Canadian dollar outshined all of its major rivals overnight after the Bank of Canada yesterday signaled that lending rates could begin to rise as early as June 1. In its statement, the BOC dropped its previous commitment to keeping lending rates at record lows until the third quarter as a result of an accelerating pace of economic recovery that had exceeded officials' expectations.
Policymakers did say that economic data between now and early June would dictate the outlook for monetary policy, suggesting that any slowdown in the pace of recovery could result in longer time line for record low lending rates.
However, recent upside surprises to domestic economic data, particularly the relatively robust jobs growth in the past three months and the rise in inflation above the BOC's target in February, suggest that rates will rise from the record low 0.25% in June.
Key data this week, including retail sales and March's CPI on Friday, will help cement market expectations for BOC rates over the coming months. The combination of an improving yield outlook, resilient domestic economy, elevated commodity prices and improving demand from the U.S. should keep the CAD's upward momentum intact. Going forward, however, the loonie could eventually become vulnerable to selling, if China acts to tighten monetary policy or if the global economic recovery story begins to lose traction.
: The euro tumbled across the board early this morning as credit and CDS spreads widened to record levels. Greek/German 10-year bond spreads soared to over 504 basis points, the widest in more than 12 years. The premium charged to Athens to borrow from the market highlights the level of nervousness investors feel about Greece's ability to finance its deficits.
Talks between the EU and Athens are set to start today on exactly what conditions financial aid for Greece will entail. New details on the deal would help to reduce some market uncertainty and could provide the single currency with near-term respite. However, the euro's longer-term upside should remain very limited due to ongoing debt issues in the bloc.
: The pound was buoyed by another batch of positive data overnight. Britain's claimant count, the number of citizens filing for unemployment benefits, fell by 32,900 in March, better then the drop of 10,000 forecast and the second straight month of significant job creation in the U.K. The unemployment rate, however, unexpectedly rose from 7.8% to 8.0%.
Meanwhile, the minutes from the BOE's policy meeting earlier this month showed that officials voted unanimously to keep lending rates at record lows, but that some were becoming more concerned with rising price pressures. Yesterday, data showed a big jump in the CPI, which sparked speculation that officials could begin to lift rates sometime around the end of this year.
An upside surprise to Friday's GDP for the first quarter could add to speculation of a BOE rate hike sooner than previously expected and support the sterling. However, its upside is likely to remain limited as a result of political uncertainty ahead of next month's general election.
Omer Esiner serves as the Senior Currency Market Analyst at Travelex, Inc. a global financial institution specializing in corporate foreign exchange services and international payment solutions. In this capacity, he monitors, analyzes and interprets the economic, financial, political and technical factors that drive the movements of more than 100 currencies for Travelex. Mr. Esiner explains the currency markets' reaction to market events to clients, employees and members of the media.
You can view his daily reports, recording briefings, and quarterly reviews posted
. As an expert in foreign exchange, Mr. Esiner is quoted regularly by the financial media including The Wall Street Journal, CNN, Dow Jones Newswires, Reuters, the Nightly Business Report, National Public Radio, among others. Based in Washington, D.C., Esiner joined Travelex in February 2000. Prior to his current position, Esiner was a currency trader for several years. Mr. Esiner holds a bachelor's degree in economics from the University of Maryland, College Park. He is fluent in Turkish and proficient in Spanish.