By Omer Esiner of Travelex
The U.S. dollar pared some of this week's gains against the euro overnight as investors saw an increasing likelihood that a financial lifeline for Greece could be extended by the EU and IMF in the coming weeks. The prospect of a financial backstop for Greece has reduced some of the market's near-term angst about its debt crisis, which had pushed the cost of borrowing by Athens to record levels.
The unsustainable levels that credit spreads between Greek and German bonds have soared to makes rolling over billions in debt coming due in the coming months nearly impossible for Greece's government. Financial aid by the EU and IMF would temporarily alleviate some of that pressure and should see the euro benefit from the reduction of default concerns. Still, the euro's longer-term outlook remains quite bleak, given the long list of structural issues in the 16-member bloc.
Sterling caps off a positive week near its highest levels since mid-February. Decent economic figures and moderating political uncertainty have helped the pound regain its footing against nearly all of its major rivals.
The Canadian dollar fell to session lows across the board after March's closely watched employment report failed to meet market expectations. The softer-than-forecast jobs figures dented some of the market's optimism about recovery and reduced some expectations for near-term BOC policy normalization.
No U.S. data due out today.
: The euro firmed across the board overnight as investors began to see an increasing likelihood of a financial lifeline for Greece in the coming weeks. The increasing cost of borrowing from the market has created an unsustainable situation for Athens, who must roll over billions in debt coming due in the coming months. The fact that market participants have grown increasingly nervous over Greece's debt issues have clearly been highlighted in the widening credit spreads and record costs of insuring Greek debt against default.
An EU/IMF financial bailout of Greece should help reduce some of the near-term pressure felt by Athens and allow it some breathing room in putting its financial house in order. The euro could enjoy additional near-term gains under such a scenario.
However, Greece's (or other euro zone nations') debt issues are far from resolved and are likely to continue to weigh on the outlook for the single currency. Additionally, the fiscal reforms needed to bring deficits in the euro zone back down should undermine already weak growth and likely postpone any ECB monetary normalization. Consequently, the euro should continue to suffer from a limited upside going forward.
: Sterling rose to its highest lavel against the USD since mid-February and to near a one-month peak against the Canadian dollar. Investors bought back the pound after a string of decent economic data this week reduced some near-term concerns about the lackluster pace of recovery in the U.K.
The latest poll showing a widening gap between the opposition Conservatives and the incumbent Labour Party also added to the pound's improved tone by reducing some political uncertainty ahead of next month's general election. Between now and May 6, news that suggests a clear majority for either party will add to sterling's improved tone.
: The yen slipped against its major rivals overnight amid reduced risk aversion and generally improved market sentiment. Reduced concerns about sovereign credit risk in the euro zone added to investors' desire for higher returns and weighed on the low-yielding JPY.
Additionally, investors began to see the JPY's run-up ahead of an expected currency revaluation by China as somewhat overdone. Traders have speculated that Beijing could allow its currency to appreciate in the very near future, a move that should see other Asian currencies, like the yen, appreciate as well. However, any move by China is expected to be very small and, as such, have a limited positive impact on the JPY.
:The loonie fell to session lows after data showed the Canadian economy added 17,900 jobs in March, below forecasts for 25,000. The unemployment rate held steady at 8.2%. The data dented some of the currency's recent luster and prompted investors to book some profits on its recent run-up to a 21-month high against the USD and a 30-month peak against the EUR.
Still, the data were not a huge disappointment and are consistent with an accelerating recovery in Canada. The loonie's broad upward trend should remain intact, but it could suffer from some more near-term losses as traders consolidate positions.
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.