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Canadian Dollar Catches Up to Oil; Euro Dilution In Full Effect

By , Currency Analyst
01 March 2012 16:03 GMT

Fundamental Headlines

- Bernanke Quells Talks of Fresh Fed Stimulus – Bloomberg

- Euro Ministers Set to Clear Greek Rescue Plan – Bloomberg

- Jobless Claims Hover Near 4-year Lows – Reuters

- China’s Share of Reserves in U.S. Dollar Dives – WSJ

- U.S. Spending, Income Rise – WSJ

European Session Summary

Higher yielding currencies and risk-correlated assets took a turn higher again on Thursday on the back of stronger than expected Chinese and European manufacturing surveys. Meanwhile, as the European Central Bank’s long-term refinancing operation matriculates into the market, an extra cushion for liquidity has been added that is supportive of risk-trends in the short- and medium-term.

With that said, price action was rather uninspiring in the overnight. The commodity currencies posted modest gains against the U.S. Dollar while the Euro and Swiss Franc depreciated slightly themselves. The Euro stands to be among the worst performing currencies this year, especially against the commodity currencies, for two reasons. First, the Euro is facing its own downside pressure given the recessing Euro-zone region. Secondly, the ECB has embarked on a substantial easing policy, one that will ultimately prove dilutive to the currency.

To this end, with extra Euros in the global financial system, institutions will then sell Euros and buy higher yielding currencies, such as the Australian and New Zealand Dollars, to capture “yield.” Going forward, I am extremely bearish the Euro versus the commodity currency block, barring any unforeseen tail-risks.

Taking a look at credit, the effects of the ECB’s LTRO are already starting to show. Italian and Spanish 10-year bonds have both moved below the 5 percent threshold, trading at 4.918 percent and 4.830 percent yields, respectively. Still, concern remains, with the Portuguese 10-year bond falling back above the 13 percent threshold. Portugal is the biggest impediment going forward to a stable European financial market going forward, discounting major fallout from a Greek default triggering the credit default swaps (CDS).

USDCAD 5-min Chart: March 1, 2012

Canadian_Dollar_Catches_Up_to_Oil_Euro_Dilution_In_Full_Effect_body_Picture_16.png, Canadian Dollar Catches Up to Oil; Euro Dilution In Full Effect

Charts Created using Marketscope – Prepared by Christopher Vecchio

Overall, the Canadian Dollar has been the best performing currency on Thursday, appreciating by a modest 0.51 percent against the U.S. Dollar. The other commodity currencies, the Australian and New Zealand Dollars, were the next best performers, up 0.45 percent and 0.31 percent, respectively. China’s PMI manufacturing print can be cited as a catalyst for this rise, considering the print outpaced the prior and forecast meeting. As expected, the Euro has been the worst performing currency following the ECB’s dilutive measure, the LTRO, yesterday.

24-Hour Price Action

Canadian_Dollar_Catches_Up_to_Oil_Euro_Dilution_In_Full_Effect_body_Picture_1.png, Canadian Dollar Catches Up to Oil; Euro Dilution In Full EffectCanadian_Dollar_Catches_Up_to_Oil_Euro_Dilution_In_Full_Effect_body_Picture_7.png, Canadian Dollar Catches Up to Oil; Euro Dilution In Full Effect

Key Levels: 14:05 GMT

Canadian_Dollar_Catches_Up_to_Oil_Euro_Dilution_In_Full_Effect_body_Picture_4.png, Canadian Dollar Catches Up to Oil; Euro Dilution In Full Effect

Thus far, on Thursday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading lower, at 9817.62 at the time this report was written, after opening at 9833.58. The index has traded mostly lower, with the high at 9836.90 and the low at 9805.49.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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01 March 2012 16:03 GMT