IB FX View

Desire for themes elevates significance of trade war

Monday September 14, 2009

It would seem that investors need a clear theme as they start trading each week. Today the focus is on the potential for a trade war after the U.S. backed the complaint of the U.S. Steelworkers Union over $1.8 billion of Chinese tire sales to the U.S. In response the Chinese are looking at U.S. chickens and autos (- cash-for-cluckers anyone?) and seem set to respond with the imposition of a tariff that could spark a trade war. This news today is setting the scene for investors to take risk off the table. The dollar rose and is so far stealing from commodity currencies where concerns are coming to the fore that the commodity rebound may have been too fast, while a trade war would slow trade.

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It’s also worth noting that U.S. regulators on Friday seized Chicago-based Corus Bank lifting the total number of U.S. bank failures in 2009 to 92. The bank had for months struggled under the stress of heavy real estate exposure and its failure is not a huge surprise. However, the failure of Corus is significant since it’s the second-largest bank to be seized with $7 billion in assets and is estimated to cost the U.S. government between $1.4 and $2.5 billion according to the Wall Street Journal. The bottom line here is that no matter how bullish investors want to be about a recovery, the harsh lessons from the great depression continue to trickle through.

The dollar relinquished some of its gains against the euro and is currently at $1.4617. The Japanese yen had earlier been rallying before a key strategist tried to debase the yen’s rally. It is now lower against the dollar at ¥01.76 and against the euro at ¥132.63. Shares of Japanese exporters suffered in Asian trading as prospects for earnings were put under the microscope. Around the region metal and mineral companies lost ground as investors reacted to a slide in commodity prices. Rubber futures dropped sharply in response to the U.S. tariff announcement. Elsewhere shares at companies within the sector fell back for fear that the not-insignificant gains recently were too much, too soon and that they may have set valuations at too high a level in the event that optimism over global activity is too complacent.

The pound ceded ground to the dollar after a weekend report from consultant, Ernst & Young’s Item Club, expressing concerns that the British housing recovery is little more than a rebound and that home values would dip into 2010 before stagnating for two years. At $1.6586 the pound buys almost a cent less than at Friday’s close as investors rethink prospects for U.K. recovery.

In addition to the escalating fears for a trade war, the Canadian dollar has to deal with the possibility of an imminent call for an election as lawmakers return from the summer recess today. Adding to the confluence of negative factors today, the price of crude oil again eased back remaining at less than $70 per barrel. None of this is good for Canada, but one has to put this into the perspective that we set out with. Investors crave themes to pin their trading habits and none of these factor might be a big deal by tomorrow in the grand scheme of things.

But for today, a potential trade war that could slow the cogs from turning isn’t good news. Whether we get to that point is an altogether different matter.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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