IB FX View A giant parabola Wednesday May 20, 2009 An outburst of technical buying of all major currencies against the dollar saw the U.S. unit on a trajectory towards the trash can as hardened dollar bulls were mercilessly trampled underfoot. The chart pattern is similar on all pairs with new highs being bought and accentuating dollar weakness as volatility erodes across stock, credit and currency markets alike. The rally in commodities creates a fresh leg of support for both commodity currencies but at the same time provokes concern that a return to norm only brings a dawning realization that consumers face a tough time ahead. Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc We say this with good reason. Tuesday’s construction weakness came as a giant surprise. Investors were leaning on a string of logical excuses to conclude that housing construction would return spurred on by a normalization of prices. But that overlooks a rather large inventory overhang that will take years to work out of the system. Only in investors’ minds and perhaps in the recent responses from builders wanting to be bullish is the upturn intact. Stage one of our parabola is in place. Still, today it appears that equity investors have shaken off the blues and are buying equities hand over fist. In Great Britain, the pound continues to climb. Its ascent is more a function of reverting to a mean having suffered at the hands of risk aversion in 2008. A CBI manufacturing output survey today revealed stage two of our parabola as it showed that factories’ order books with an index reading of minus 56 in May versus minus 57 in April show that ebullient consumer optimism is not being met by a material pick-up in demand. If you want to believe that rising stocks ushering in higher confidence are anything more than a leading indicator, feel free. The CBI survey did show a claw back from a minus 32 reading for output expectations from an icy minus 32 reading. A weakening in the reading of a weekly U.S. confidence survey is again out of place with investors’ actions. The index fell to minus 45 from minus 42. We noted earlier that rising commodity prices were giving comdols a lift, but looking beneath the CRB index and just filling one’s tank at the gas station, its doesn’t take a genius to work out that the return of confidence is undoing the effective tax-holiday that much-needed depressed gas prices delivered. Consumers are paying one-quarter more to fill up their gas tanks each week than three months ago. Once again a parabolic trajectory is carving its way into consumption habits as the feel good factor gives way most likely to higher saving than higher spending. We need not remind readers of what’s happening to unemployment. Down under where this week’s RBA minutes revealed optimism that the domestic economy would be spared the punishing contraction doled out by the American financial backlash, consumer confidence declined despite an ongoing stock market rally. Yet again our parabolic curve fits the picture as the Westpac Banking Corp. and Melbourne Institute’s consumer confidence survey took a turn for the worse, slipping 4.7% to stand at 88.8. A reading of 100 balances the sentiments of optimists and pessimists perfectly. For the sixteenth straight month, pessimistic sentiment pervades. The World Bank also made a canny observation today, which we have noted in this column before. While China remains the largest importer of Australian physicals, the recovering health of its economy is largely spurred on by government stimulus and a chain reaction of government inspired lending. As the World Bank observes, it is hard to get optimistic about this turnaround until private investment picks up where the government leaves off. That is our final parabola in that the Chinese stimulus spending represents a rise in activity that might once again plateau unless it sparks private initiatives to keep going. For now, investor sentiment is getting in the way of the dollar. The euro reached all but $1.38 on the back of the spring board higher in the last hour. The British pound ramped up to $1.5650 while the dollar recoiled even against the Swiss franc to Sfr1.0975 and against the Canadian dollar to C$1.14. The dollar basket has not been this weak in 2009. Any dollar recovery will be predicated on more of the data that spells protracted global recovery. Andrew Wilkinson Senior Market Analyst firstname.lastname@example.org Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. 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