IB FX View
Chorus of dollar bears meets crescendo
Thursday September 17, 2009
No analyst wants to be left behind, which partially explains the shortage of dollar bulls at present. An acceleration of global stock index values explains the global recovery theme and why it’s a current noose around the neck of the dollar. And as the world’s stock markets stretch like a piece of elastic more observers throw in the towel on the dollar. However, today’s one of those days when everyone is throwing the same punches and there’s no opponent left to punch. The dollar has rebounded from its lows as investors find themselves overly punch-drunk on dollar shorts.
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While there were bullish words spoken on behalf of the global recovery driving yesterday’s currency market action, today the bad-cops are back in town serving up more cautious outlooks.
French finance minister, Christine Lagarde was cautious on recovery. Her remarks rocked the euro for a short time before it recovered to $1.4730. Earlier the single currency traded at $1.4767 and its highest since September 25, 2008.
The Swiss National Bank left rates unchanged at its monthly meeting today but warned that it remained vigilant against currency strength and would act to sell the Swiss franc should the case warrant. In addition it said it would maintain its policy of purchasing bonds to maintain credit market conditions. It sounded far more cautious than various reported central bank comments from Wednesday.
Even the Bank of Japan in what was essentially a more optimistic reading of its economy warned of the rocky road ahead. And while the opportunist Aussie dollar used this as a springboard to rally against the yen, it eased back against the U.S. dollar to 87.30 cents as the investors heeded the more cautious tone to trading.
The U.S. dollar was fed further currency-negative news in the shape of a 12,000 decrease in weekly jobless claims through last weekend, while housing starts grew to a nine-month high at an annualized 598,000 pace. Once again these further signs of recovery, although still pointing to a relatively sluggish economy, could help weaken the dollar.
Yet the dollar advance strongly against the Japanese yen reaching ¥91.62 earlier. It later eased to ¥91.09. The Bank of Japan left interest rates unchanged at 0.1% but took an important and positive step forward in its assessment of the health of the economy. It said it saw “signs of recovery,” which improves upon its view in August of an economy that “stopped worsening.” There was positive news from Japan’s service sector today where a positive showing was repeated for a second month. Meanwhile manufacturers turned positive for the first time in two years in a survey released today.
The yen also lost ground to the euro and is currently trading at ¥134.21 from Wednesday’s close at ¥133.78. Debate continues to rage as to what the impact will be on the yen now that the new DPJ government has been sworn in. On the one hand a yen rally in response to the upbeat assessment runs the risk of choking of recovery prospects. The increase in risk appetite globally argues against the need to hold the yen, while on the other hand the political impetus is now on driving the economy through spending measures aimed at helping households. Perhaps the upbeat assessment needs to feel the impact of spending reform before investors are willing to discount a stronger yen in the pure hope that it will revive household spending to the point that Japan is willing to tolerate a firming currency.
Earlier weakness in both commodity sensitive units of Canada and Australia appears to be reversing course as we conclude today’s report. The Australian dollar took its cue earlier from the BOJ report to strengthen on the cross, while a reduction in the degree of expected contraction from the South Korean economy for 2009 also helped argue the case that the Australian dollar is in a pretty sweet spot. Its 3% benchmark yield, although on hold, is a positive element especially when Pacific and Asian customers are starting to show signs of life. The dollar buys 87.42 U.S. pennies.
The Canadian dollar also rose to a near-one year high against the greenback. Currently the Canadian buys 94.27 U.S. cents. Annual consumer prices fell at a 0.8% pace in August according to statistics released today, which proved greater deflation than the Bank of Canada would like to see, while the core reading saw annual consumer prices rise at a 1.6% pace.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
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