Friday FX Brief: Risk Aversion Meets the G20

OTTAWA — When Bank of Canada governor Mark Carney moves onto his new U.K. job in July, it is likely little else will have changed back home. Interest rates will still be at near-record lows, and the economy will be continuing to churn out less-than-stellar growth. Not surprisingly, the central bank on Tuesday kept its trend-setting rate on hold at 1%, where it as been since September 2010. That is the longest stagnant period since the early 1950s.

Inquiring minds are digging into details of the latest Eurozone releases. The Markit Flash Eurozone PMI® says Eurozone slides back into recession as output falls at stronger rate in March Both manufacturing output and service sector activity contracted in March, showing the worst performances for three and four months respectively. However, in both cases, the rates of decline were only very modest.

Curious how Europe's insolvent peripheral countries, where the government is increasingly the only source demand (if not funding), have managed to avoid falling into a primary budget deficit abyss? Simple: instead of paying their outstanding bills, Europe's insolvent nations are simply not paying them. And with the entire European bond market now a central bank controlled policy mechanism, meaning there are no longer any checks and balances to keep governments honest, there is no pressure on said countries to actually pay.

TORONTO — Canadian manufacturing growth slowed for a fifth straight month in November and hit a more than two-year low, according to data released on Monday, signaling the third quarter’s disappointing economic performance may persist for the rest of the year. The RBC Canadian Manufacturing Purchasing Managers’ Index was 50.38 last month, compared with 51.39 in October. It was the weakest reading since data collection began in October 2010, and came dangerously close to contraction.

With negative sentiment toward China reaching an extreme in recent months, patient investors have been rewarded with recent news of improving data from the Asian giant.

MARKETS could scarcely have done more on Friday to register their approval of the progress made in last week's EU summit talks. Equities skyrocketed and sovereign-bond yields tumbled on word of a tentative agreement to allow euro-zone-wide emergency funds to provide direct support to member-state banks. The rally continues this morning, for both equities and bonds. But while markets may continue to express their relief at last week's news, the outlook for the real economy looks increasingly grim. In fact, grim hardly does the situation justice.

Andrew Wilkinson submits: After several weeks of building expectations over the depth of what the FOMC might deliver, it seems investors have quickly come to terms with its impact on the value of the U.S. dollar. While most onlookers were quick to conclude that the Fed was deliberately devaluing the dollar, it’s the parlous state of peripheral European state finances that is limiting appetite for Eurozone-based assets.