The U.S. Dollar had a mixed performance last week, rising sharply against the commodities currencies, where it gained 3.9% versus the Aussie, 3.6% against the Kiwi and a slightly less dramatic 2.5% vis-Ã -vis the Loonie.
Nevertheless, the Greenback declined 1.5% and 0.9% against the Euro and Sterling respectively, and the Dollar also fell sharply against the Yen by 2.3%.
Furthermore, Gold also had a major reality check, dropping over $60 per ounce at one point last week and settling at $1,207.70 per ounce for the Comex August gold futures contract on Friday.
Crude oil was also down considerably, with August NYMEX Crude futures closing at $72.14 per barrel. The weakness in commodity markets translated into big gains for the U.S. Dollar and the Japanese Yen against the Aussie, Loonie and Kiwi.
The Canadian Dollar’s considerable weakness versus the Greenback was largely attributed to falling crude oil prices. Furthermore, a significant drop in Canada’s Raw Materials Price Index “” which declined -7.2% and considerably worse than the 0.3% expected decline “” also probably contributed to the Loonie weakness.
The Dollar’s loss of ground versus the European currencies primarily came on the back of on weaker U.S. economic numbers, as well as positive signs from the ECB, since European banks borrowed less than expected at an auction of debt securities held on Wednesday.
ECB Funding and Bank Loan Repayments Went Well
Last Wednesday, the ECB loaned 171 banks a total of €131.9 billion over the next three months. This relatively low aggregate loan level favorably surprised markets and drove the EURUSD rate higher.
The corresponding sharp rise in the Euro was widely attributed to the fact that expectations for demand were as high as €250 billion by some estimates. A Reuters’ poll estimated the consensus slightly lower at €210 billion.
The lower demand for loans eased concerns in the market about the loan repayment of close to half a trillion Euros that was scheduled for the next day on Thursday. Also, the lack of demand for the loans raises the risk of higher interest rates in Europe if a lack of liquidity ensues.
While €131.9 billion is still a hefty number, and the highest amount ever loaned by the ECB in a three month operation, the amount is dwarfed by the €442 billion in one year loans which 1,121 banks had to repay on Thursday. This may well have led to the large spike up in the Euro seen that day.
Also on Thursday, the ECB provided €111.2 billion for six days as an extension to just 78 of the banks which participated in the twelve month, €442 billion loan program. This significantly reduced amount gave the market a breath of hope after the severe European debt concerns of the last months.
Were Carry Trades to Blame for the Aussie and Kiwi’s Hammering?
The Thursday deadline for the ECB loan repayments may well have had something to do with the sharp downward correction in the gold market and the sell off of the higher interest rate commodity currencies of the Aussie and Kiwi Dollars, as well as the Euro’s dramatic spike upwards on the repayment due date.
A very likely scenario, if one examines the price charts of the currencies involved, could be that some European banks borrowed the emergency funds from the ECB last year in order to establish carry trade positions in higher interest rate currencies like the Aussie and Kiwi dollars against the borrowed Euros, as well as long gold positions.
A carry trade involves first borrowing and selling the currency of a country with low interest rates in order to purchase and lend out the currency of a country which pays high interest rates, thereby collecting the difference. This long term strategy is especially profitable if the prevailing currency trend favors the higher interest rate currency over the low interest rate currency.
In essence, given the Aussie and Kiwi Dollars’ roughly coincident decline slightly earlier than the Euro spike upwards, perhaps at least some of these banks taking loans from the ECB had participated in carry trades. These could have involved borrowing cheaply in Euros from the ECB and then lending in Aussie and Kiwi Dollars at considerably higher interest rates.
Interest rates in Europe, Japan and the United States have remained extremely low since before the beginning of the economic crisis in 2008, while the Australian and New Zealand economies have remained relatively robust, resulting in considerably higher interest rates.
Since any carry trades using these funds would need to have been unwound in order to repay the loans, under this scenario, the Aussie and the Kiwi would get hammered while the Euro would increased sharply against these same currencies. This is exactly what was observed.
Another possible play involved some banks borrowing the Euros from the ECB to buy gold. Gold also sold off dramatically around the time of the repayment due date as the Euro spiked higher.
All in all, last week saw the resurgence of risk aversion, which periodically surfaces in the currency markets in uncertain times. Nevertheless, the Euro and the Pound Sterling also gained in light of better relevant economic numbers and growing relief in the European debt markets.
The Greenback and Yen Benefit From Risk Aversion
All in all, last week saw the resurgence of risk aversion, which periodically surfaces in the currency markets in uncertain times and tends to benefit the U.S. Dollar and the Japanese Yen.
Nevertheless, the Euro and the Pound Sterling also gained in light of better relevant economic numbers and growing relief in the European debt markets.
The U.S. Dollar, while strengthening considerably against the commodities currencies, lost ground against the Euro, Sterling and Yen, with a slew of uninspiring economic numbers acting as contributing factors.
For its part, the Yen also showed considerable strength against the commodity currencies and benefited from the extreme risk aversion prevailing in the markets.
Nevertheless, risk aversion may not last once the ECB loan repayments and any associated carry trades finish unwinding and commodities prices very likely begin heading north again. In this case, commodity currencies will again start trading higher, and will probably go much higher eventually.
Basically, the economies of the commodity currencies’ nations all seem to be in much better shape than those in Europe or the United States. As a result, it will probably only be a matter of time before these countries’ currencies begin rising again given their relatively attractive interest and growth rates.
Weekly Recap and Outlook for the U.S. Financial Markets and Dollar – 7/05/2010
The U.S. Dollar had a mixed week against the major currencies last week, falling against the British Pound Sterling and the Euro and rising against the Japanese Yen. The commodity currencies were especially hard hit last week, with the Canadian Dollar losing 2.5%, the Australian Dollar down 3.9% and the New Zealand Dollar off 3.6%. Read Full Report
Weekly Recap and Outlook for USDJPY- 7/05/2010
USDJPY declined substantially last week as the Yen benefitted from increased risk aversion in the forex market, although the rate started the week off positively by making its weekly high of 89.47 on Monday after Japanese Retail Sales increased by just 2.8% versus a consensus of a 4.7% increase. Read Full Report
Weekly Recap and Outlook for USDCAD- 7/05/2010
USDCAD was up considerably last week as soft commodity prices and risk aversion in the markets took their toll on the Loonie. The rate started the week by trading off of its weekly low of 1.0319 made on Monday. USDCAD then continued trading sharply higher on Tuesday after the Canadian RMPI came out with a decline of -7.2%, considerably lower than the -0.3% decline expected. Read Full Report
Weekly Recap and Outlook for NZDUSD- 7/05/2010
NZDUSD joined the other commodity currencies in getting slammed hard last week.
The pair started last week out by trading off of its weekly high of 0.7154 made on Monday. The rate then began heading south as New Zealand Building Consents showed a steep decline of -9.6% versus a previous reading of an increase of 8.5% and NBNZ Business Confidence came out with a reading of 40.2 versus a previous reading of 48.2. Read Full Report
Weekly Recap and Outlook for GBPUSD- 7/05/2010
GBPUSD had a volatile week, with the rate starting off the week after the end of the G20 summit in Toronto by trading higher on Monday despite no economic releases coming out of the United Kingdom.
On Tuesday, the rate began softening after U.K. GfK Consumer Confidence showed a reading of -19 versus a consensus of -20. Read Full Report
Weekly Recap and Outlook for EURUSD – 7/05/2010
EURUSD started off last week by trading lower as the world’s leaders wrapped up the G20 Summit in Toronto by pledging to cut their fiscal budgets to bring the world out of the severe world economic crisis.
Last week began with heavy buying of the USD and JPY on a combination of risk averse market sentiment and encouraging U.S. economic numbers. In terms of economic data, U.S. Personal Spending out on Monday was up 0.2% month on month, a bit higher than the 0.1% consensus. Read Full Report
Weekly Recap and Outlook for AUDUSD – 7/05/2010
AUDUSD was off considerably last week on weaker commodities prices and growing risk aversion. The rate began the week by trading off of its weekly high of 0.8775 made on Monday.
On Tuesday, the rate started coming under pressure after Australian Private Sector Credit rose to 0.5% versus a 0.4% consensus. Read Full Report
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