Risk appetite recovers as referendum fears subside

USD

The dollar traded mixed on a choppy day as conflicting news and data – mainly from Europe - impacted on the currency which rose and fell with each new piece of information. The dollar strengthened during the overnight trade as political instability in Greece continued to hit risk appetite after fears the latest bailout package might be rejected in a referendum, however a mutiny within George Papandreou's government led to speculation he might lose the confidence vote on Friday possibly resulting in the referendum being scrapped. This led to a rally in riskier assets and the dollar suffered. Then the ECB rate announcement once again helped the greenback to rise after the central bank cut the rate by 25bps. Dovish commentary from the new ECB President Mario Draghi also helped push the dollar higher. Growing speculation that Greece might leave the euro altogether – and that this could stabilize rather than destroy the single currency led to a final rally in risk appetite and the dollar once again broke lower. Meanwhile data was largely positive: with Continuing Jobless Claims falling to 3683k vs 3693k expected and Initial Jobless Claims falling to 397k vs 400k expected; Non-Farm Productivity rose to 39.6 vs 39.2 and Unit Labour Costs fell by -2.4% when a drop of -1.0% had been expected.

EUR

 The euro oscillated as news from Greece affected the outlook for the stability of the financial system in Europe. Initially the single currency fell below 1.3700 on fears that Greek's would reject the latest bailout deal in a referendum vote, then news that some of Papandreou's colleagues were rebelling against the idea and it might not go ahead led to a resurgence in risk appetite. Dovish commentary from the new President of the ECB Mario Draghi, however, led to a sharp sell- off in the euro as he painted a darker economic outlook for the rest of 2011; and the announcement of a 25bp cut in the central bank's lending rate weighed heavily. A brighter outlook for the Greek situation – with various scenarios and possibilities being suggested and not all of the disastrous, framed a more positive reaction to the political uncertainty and the euro began to recover. Even the possibility of Greece leaving the euro altogether was not seen as too bad by some commentators, although the continued lack of clarity on the situation could hamper any strength in the euro until after the confidence vote on Friday.  


GBP

The pound traded mixed – rising versus the dollar and the yen but falling to the euro as general risk appetite turned positive amidst a boost to Greek debt hopes after the prospect of a referendum diminished. A rebellion in Papandreou's cabinet and harsh talking from other euro-zone leaders who convened in Cannes reduced the likelihood of a referendum if not dispelled it, and markets rallied on renewed risk appetite. The pound managed to shake off worse than expected Services PMI to trade higher versus the dollar and it traded higher against the euro following the news of the ECB rate cut, although gains were pared soon after as the outlook for the U.K economy weighed. Forecasts from the National Institute of Economic and Social Research lowered growth estimates and gave the U.K a 50% chance of falling into recession. Services PMI fell to 51.3 vs 52 expected and 52.9 in the previous month of September. Other data also showed an increase in Official Reserves to $1387m vs -$2444m in the previous month of October. Commentary showed further easing still expected and weaker outlook for sterling remains dominant theme.

JPY

The yen strengthened against the greenback but fell versus the riskier currencies after the threat of referendum in Greece reduced, temporarily restoring stability to financial market conditions. The rally in risk appetite led to a rise in the euro and pound against the yen but gains were muted as intervention fears led to a certain amount of yen-avoidance and a national holiday in Japan also capped participation. Yesterday's reports of the Bank of Japan engaging in dollar provisioning market operations following a contraction in liquidity in the money markets had been a sign of heightened risk aversion but this was not particularly reflected in today's currency fluctuations. The yen traded higher against the dollar despite higher treasury yields as the greenback fell out of favour with investors following renewed optimism over the outlook for Europe.