IB FX View

A tad of risk aversion boosts dollar

Wednesday August 5, 2009

A more negative tone set the scene for a minor dollar rebound after an ADP Employers Survey showed a higher rate than forecast of private sector job losses for July, albeit at a lesser pace than in June. A separate report signaled less corporate layoffs ahead but the overall picture was mixed providing respite to a dollar currently prone to selling in light of a brightening economic picture. In mid-morning trade the dollar had strengthened to $1.4376 against the euro while it also bought ¥95 yen.


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Two events overnight forced a rethink on commodity currencies very recently. Veiled intervention threats were let loose by Canada’s finance minister who warned of steps to prevent the speculative attempts by some investors to drive the local dollar higher. Weaker Asian equity prices prompted selling of Australian and New Zealand dollars as the strength of the recent run-up failed to find further rationale for continuation.

The ADP Employers Survey revealed 371,000 job losses for July and so sharply lower than the June reading of 463,000. The survey revealed further signs of housing and manufacturing stability. On Friday the all-important Labor Department non-farm payroll data will be released and is predicted to show 328,000 further losses lifting the rate of unemployment to 9.6%. Today’s Challenger Gray & Christmas survey of planned corporate layoffs in July produced a 5.7% decline over the previous month and was the first back-to-back monthly reduction in almost two years.

The Australian dollar fell today to buy 83.66 U.S. cents as the market eagerly awaits Thursday’s domestic employment report, which is predicted to lift the rate of unemployment to a six-year peak. In the last week the Aussie has been propelled higher by comments from RBA governor Stevens who undermined the impact of the severity of the global downturn on the Australian economy.

Some analysts say that the longer-term run higher for the Aussie is tied to funds finding their way in to the currency from Japanese investors but are predicting Aussie weakness ahead. So called Toshin funds are raised by Japanese trust companies used specifically to buy overseas assets. The surge in the Aussie unit since February can be tied to the acceleration in funds raised by Toshin funds. However, the fact is that the Toshin amounts likely to be raised throughout August are tiny and this creates for a potential pullback in the Aussie.

Today’s lackluster start for equities spurred some yen buying with the euro declining to ¥136.50 while the pound fell back to ¥161.06. The pound was otherwise well supported rising to $1.7043 following data showing a larger than forecast expansion in the U.K. service sector. A Markit survey of services showed a rise to an index level of 53.2 for July after 51.6 in June. Meanwhile a 0.4% monthly gain in manufacturing output stunned traders expecting a further mild contraction in activity.

Today’s data leaves manufacturing and industrial output lower by 11% year-over-year through June. Meanwhile, the Halifax Building Society, now part of Lloyds TSB, showed a surprise 1.1% gain for British property values after a 0.5% decline in June. As the dollar rebounded mid-morning sterling pared gains forcing the unit back to $1.6958.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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