IB FX View

Dollar bulls continue to force yield issue

Tuesday January 5, 2010

The story remains the same everywhere you look around the world. The manufacturing baseline expansion continues to underpin expectations for a decent first half of the year. Money managers see little reason not to add equities, commodities and higher yielding currencies to their portfolios as investing resources are shifted to where opportunities continue to arise. Dollar bulls are also dealing with a self-induced rise in treasury yields that inevitably sets the scene for a showdown with the Fed. Yields around the world have been marched up to the top of the cliff and those who used the excuse of rising yields during December to buy the dollar are going through a severe bout of self-doubt as the dollar weakens. In the presence of comments from two Fed officials in two days aimed at reinforcing the low interest rate environment, traders need added rationale to remain positioned dollar long. It’s time to either back down the hill or face the leap of faith into the abyss.


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U.S. dollar – The dollar index is down for the second trading day of the year as investors weave into the mix the words of Fed member, Elizabeth Duke. She referred yesterday to “subdued” readings for inflation and reaffirmed the Fed’s stance that price expectations were likely to remain stable with many sectors of the broad economy running at under capacity. Investors subscribing to the dollar bullish view that rising activity will unleash a round of tighter monetary policy from global central banks are struggling to make headway. The Reuters/ Jefferies CRB index of commodity prices rose on Monday at its fastest daily pace since November 25, adding 2.1% as investors bought crude oil, gold and other raw materials as evidence mounted that manufacturing activity was further expanding. Such activity doesn’t necessarily bode well for dollar bulls simply because investors pay for commodities using dollars and those minerals, grains and metals clearly are in greater demand than the U.S. dollar. The dollar slipped one-third of a cent against the euro to $1.4446 ahead of Tuesday’s trading. Earlier it reached $1.4484, its highest since December 17.

Aussie dollar – Data wise there is little to write home about regarding the Australian economy. Home sales rose in November at a 0.3% pace having declined in October at a 6% pace when Australia was in the middle of a series of interest rate increases. The building demand for commodities is clearly a positive feature for the Australian dollar, which overnight traded at its highest price against the dollar since December 14 at 91.75 U.S. cents. From today’s data watch out for the relative impact from the release of U.S. factory orders, which are due to show a third straight monthly increase. Arguably this should bolster the U.S. dollar, but it will more likely continue to drive the theme of rising demand for materials, which is a feature that fits the prime time billing for the Aussie dollar. The Aussie also rose to a two-year high against the euro today – a sign that risk appetite is back with a vengeance.

Canadian dollar – Modest gains for energy and metals prices in the face of the cold snap and signs of rising industrial demand continue to leave investors biased towards the Canadian over the U.S. dollar. The Canadian unit rose to its strongest since October 20 this morning adding to Monday’s gains and currently buys 96.61 U.S. cents.   

British pound – Traders are once again only touching the British pound with the aid of a rather long barge pole with the recent launch of the 2010 general election campaign as the icing on the cake of a rather sour recipe. In the face of the falling appetite for the dollar as interest rate arguments decline, the pound is finding it hard to muster any sustainable rally given the implications of the rising risk appetite for low yielding currencies. The present focus is on what might happen in the event that an indecisive election outcome leaves the government incapable of rectifying a decaying fiscal position. The pound fell to $1.6021 this morning while losing out to the euro to 90.11 pence.

Japanese yen –The yen received a boost from corporations repatriating overseas earnings and the announcement from of a large financial company that it would increase a boat-load more shares. The fact that the dollar slipped from a seven-week high apparently triggered an avalanche of stop-loss selling that has seen the yen strengthen to ¥91.75. The demand for yen trickled through further to yen crosses, where a growing sense is emerging that the fall in the yen was too rapid especially against minor currencies. In testimony to this the Aussie dollar fell to the yen to ¥84.08.   


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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