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By Gaurav Kashyap, Alpari ME DMCC
Euro, commodities up on Dexia solution, debt crisis unity
The Euro snapped a three-week slide against the Japanese Yen and closed at 107.12, notching up a 4.20% gain on the safe haven currency in the past week. Sterling crosses also gained across the board, GBPUSD increased to 1.5819 to close the week 1.70% higher while GBPJPY gained 2.25% to trade at 122.13 after hitting an intraweek high of 122.60. The Aussie and Canadian Dollar also posted gains against the US Dollar, closing at 1.0335 and 1.0097 respectively.
The heightened risk appetite filtered into equities and commodities too. The Dow Jones closed the week 4.88% higher, while the S&P gained a more impressive 5.98% on the week. Across the pond, the UK FTSE index gained 3.16% with similar gains in the German DAX which closed 4.61% higher. Commodities benefitted from the newfound optimism in the markets with Gold closing at 1680.50, a gain of 2.50% and the West Texas Crude closing above 87 levels, gaining a healthy 5.28% on the week.
The rally was essentially put into motion as early as last Sunday after a meeting between Merkel and Sarkozy saw a successful resolution of the Dexia bank breakup. The Dexia result wasn't as engaging as Merkel's comments which fuelled views that a unified solution can be found to take Europe out of the debt crisis.
Optimism returns so tmarkets
Speaking in Berlin, Merkel said that "We are determined to do the necessary to secure the recapitalization of our banks and will present a complete package" at some point towards the end of the month and it was this unified front from the German and French leaders which saw optimism flooded back into the markets and really kick started the bullish sentiment driving the common currency Euro. The flight to risk increased, despite a change in government in Slovakia and its initial non-ratification vote to shore up the EFSF fund to EUR440bn. The vote was ratified the second time round and continued to improve risk sentiments, seeing Euro pricing moving higher.
Markets continued to be bullish through to the end of the week which saw a gathering of the G-20 Finance ministers in Paris. The rumours that a credible solution could be structured at the meetings saw the Euro close the week above 1.388 levels. Amidst all the developments regarding the European sovereign debt crisis, perhaps the only talking point on the European calendar was Wednesday's EU industrial production reading which saw the year on year reading increase to 5.3% (v 4.4% prev) while the month on month reading increased to 1.2% (v 1.1% prev).
Sterling crosses post gains, despite weak data
Sterling crosses were able to post strong gains despite some weaker data from the UK this past week and also seemed to benefit from improved risk appetite. Tuesday's industrial and manufacturing production readings dropped to -1.0% (v -0.9% prev) and 1.5% (v 2.6% prev) respectively while Wednesday's UK jobs data was mixed, unemployment claims dropped to 17.5K (v 19.1K prev) while the ILO unemployment rate increased to 8.1%, its highest level in seventeen months.
Australian dollar sees strong gains
Perhaps the star performer of the week was the Aussie which has been able to gain a remarkable 5.89% to close at an impressive 1.0335 on the week. The Aussie which has benefited so much from the recent uptick in risk moods, was further supported by some improved data from down under, Thursday's Australian jobs data release showed some impressive gains - employment increased to 20.4K against a previous month which had losses of -10.5K and the unemployment rate dipped to 5.2% from 5.3% previously. The Aussie was still trading strong despite a drop in export data emerging from China. Exports from China rose the least in seven months as data showed Chinese exports fell to 17.1% as compared to 24.5%.
Looking at the trading week ahead, we continue to follow the bank recapitalization story along with more developments from Europe (and their subsequent impact on risk behavior) in the week ahead. Wednesday's BoE meeting minutes will surely see the volatility continue in Sterling crosses while Wednesday also sees the release of US inflation data.
Staff
