IB FX View

Air of panic sends dollar running rampant

Tuesday January 26, 2010

The enactment of a previously announced rise in the reserve ratio requirements at China’s banks has created a bearish tone for risk on Tuesday sending equity prices back down and raising the self-worth of the dollar. Weighing on sentiment is a downgrade to the outlook for Japan’s sovereign debt and a lackluster crawl out of the growth cesspit in Britain. Meanwhile, core European confidence was surprisingly strong but the day so far belongs to a dollar that started the week with a never-say-die attitude.  The People’s Bank of China stepped up lending restrictions mid-January and investor paranoia is leading to an acceleration of the view that China will move to thwart rampant growth to the detriment of the global economy. Going unnoticed in today’s market activity, however, is the fact that today marks the first week in three when the PBOC failed to increase the yield on the 12-month bill at its regular weekly auction.


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U.S. dollar – Ignoring Monday’s interruption to risk aversion, the dollar is proceeding where it left off last week as risk aversion appears to be popping up all over the map. A downgrade to the Japanese sovereign debt outlook and investors still nervous over prospects for growth in China as the central bank implements higher deposits from its banks have maintained a high reading on the risk barometer today. As a result S&P futures are lower ahead of the U.S. opening in line with weakness for Asian and European stocks. It appears that there’s still a greater resistance to allowing the pro-growth camp to make their case. The dollar index is higher, while fixed income is feeling the benefit of minor measures announced from the U.S. government yesterday when it delivered a three-year freeze to certain spending categories.

Japanese yen –S&P indicated that the Japanese government was running out of options in dealing with economic weakness and cut Japan’s long-term sovereign rating from stable to negative. Despite the downgrade the yen was bought given the souring of the tone created by the Chinese banking measures. Investors bought the yen and sold positions taking advantage of the wide yield differential to be made from holding assets in other currencies and asset classes. The yen advanced against the dollar to ¥89.67, while jumping two yen to the pound at ¥144.52.

British pound – Investors had been anticipating that the economy of the United Kingdom would convincingly cast off the shackles of recession in the final quarter of last year with a decent rebound to a 0.4% quarterly pace of growth. So you can perhaps imagine the disappointment with which investors greeted a mediocre 0.1% reading this morning. Investors concerned that consumers still continuing to deleverage personal balance sheets will further restrain the current quarter data, shed the pound today forcing it down to $1.6103 in early New York trading. Sterling also gave back recent gains made against the euro and is trading this morning at 87.33 pence.

Euro – The euro is lower on Tuesday despite a couple of decent pieces of noteworthy news. The overall risk averse tone is keeping a lid on any effort to rise made by the single European currency. The German IFO survey of business confidence for January rose from 94.7 to 95.8 probably due to improving export markets. Meanwhile data also showed the strongest gain in consumer spending in over a decade in France, which on any other day of the year might have helped lift sentiment toward the euro. Spending on car purchases due to government incentives is the probable cause for the strong reading in spending, raising the prospect that the run won’t last. Still, it should underscore a positive fourth quarter GDP report.

Flushed with confidence after Monday’s sale of five-year paper, the government of Greece today announced the February issuance of 10-year paper. Despite the confluence of better data and a reprieve from some of the recent peripheral market pressure, Eurozone stocks fell after losses were sustained across Asian bourses overnight. The euro is lower against the dollar at $1.4081 and is down to its lowest point since April 2009 against the Japanese yen at ¥126.27.

Aussie dollar – It’s a national holiday in Australia, but its currency has weakened on the back of the Chinese moves to restrain lending. Adding to the pressure on the Aussie unit today, which is lower at 89.65 U.S. cents, is news that several of China’s banks face higher deposit reserve requirements in the order of an additional 0.5% according to a Reuters story doing the rounds. Being Australia’s biggest customer, the potential for a slowdown undermines investors’ appetite for its dollar.

Canadian dollar – The local dollar is coming off the weakest reading against the U.S. dollar in a month after crude oil and base metal prices reacted negatively to the China story earlier today. Canada’s dollar touched 93.82 cents in early trading before rallying to 94.05 cents before 8am ET.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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