IB FX View

Dollar loses more friends

Monday January 11, 2010

Several headlines are shaping trading patterns early on this Monday morning, with the main driver being Chinese customs bureau data indicating a surge in trade volumes. What’s catching the eye of investors is the fact that export volumes not only surged during December but also rose for the first time in 14 months, sending up a giant flare illuminating the fact that global trade continues to improve. The U.S. dollar is weaker across the board as Friday’s weaker tone set in the wake of a weak reading for employment data is compounded by comments once again indicating that the Federal Reserve is unlikely to move on rates yet.


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U.S. dollar – It was St. Louis Fed president James Bullard who followed up on the loss of 85,000 U.S. jobs in December with some comforting words regarding monetary policy. He said that monetary policy was likely to remain accommodative for quite some time. Indeed since the report last week, the implied odds of a rate rise from the Fed by June have fallen from 60% to stand at 34%. While the U.S. recovery very likely remains intact it was the pace of it that was put under the microscope last week to find that it does not warrant a reversion from the Fed’s “extended period” tone anytime soon. The lack of impetus from the prospect of rising yields has put the dollar on the back foot once again this morning leaving it friendless at $1.4528 per euro.

Back to the bigger story and that of China. The day that many Americans possibly had nightmares about has officially arrived. Official data today confirms that Chinese consumers bought more passenger cars, trucks and buses than were sold in the U.S. It took a surge of 46% in sales volumes to bump up the 2009 reading to 13.6 million vehicles. Meanwhile a 21% slump in U.S. volumes left Americans buying just 10.4 million.

Meanwhile a surge in December volumes of both imports and exports sparked the flame under a variety of asset classes to begin the week. Imports grew by 56% while for the first time in over a year export volumes rose by 18%. This news is warmly welcomed by the growth camp and is helping to spur further upward momentum behind global stocks today just as the U.S. enters earnings season.

The diverse nature of economic evidence between developed and emerging nations leaves investors fast-concluding that despite the tempered nature of the U.S. labor market is lacking, the rest of the world is very much alive in the recovery. Suddenly the risk appetite trade is back in fashion resulting in demand for traditional currency risk.     

Canadian dollar – While the Canadian dollar is highly likely to benefit from the boost from a revived U.S. economy, the lackluster nature of its own jobs report last Friday somewhat detract from an independent boost to its currency. However, the fact remains that rising prices and demand for its vast oil and gas resources leaves the Canadian dollar very much in demand. The news today from China is helping swell commodity prices around the world and is feeding an appetite for the Canadian dollar, which has jumped back to 97.35 U.S. cents today with a growing number of predictions calling for a nearby return to parity between the pair. At current prices, the Canadian unit is back to its highest against the dollar in three months.

Aussie dollar – At93.25 U.S. cents the Aussie dollar is at its highest in five weeks. As logical as today’s bullish movement is on the Aussie dollar, something seems at odds with reality on this latest bullish run. The fact that Chinese demand surged especially during December for Australia’s most valuable exports, including iron ore, the plot of the Aussie dollar during December does not support the fundamental picture. The dollar slumped at the time as dealers ditched it after the RBA appeared to have run out of arguments for belt tightening. Hence the Aussie dollar fell from 93.25 cents to 87.50 cents apparently at a time when real money was buying it in order to pay for huge amounts of physical commodities. The point being that today’s vigorous Aussie rally would seem to be the market’s late-in-the-day response upon confirmation of the news.

British pound – The pound is firmer against the dollar at $1.6150, which pretty much proves one of two things. First, the baggage that the pound currently carries in terms of a dire fiscal and political situation means that today’s preference for sterling over the dollar confirms today’s headline: The dollar indeed has no friends today. Second, it is possible that the aforementioned double-whammy for sterling is fast becoming an acceptable burden for investors to carry. In other words the story is becoming baked in to the cake.

Several contrary surveys were released today asking businesses how confident they were about prospects for the economy and for their own business. A private accounting firm’s survey of unlisted companies showed this sector to be especially optimistic looking forward. While a separate survey of financial companies showed them to be increasingly pessimistic surrounding business prospects. The CBI’s retail survey showed a net decline in the prospects for sales volumes looking ahead.

Euro – The euro is higher today on a day of little fresh data. Against the dollar it currently buys $1.4524 but is off its earlier peak at $1.4526. Today’s high puts the euro at its strongest since December 16. Against the yen, the euro has once again strengthened to ¥134.29, while it’s struggling today against sterling where one euro currently buys 89.84 pennies.

Japanese yen –The yen strengthened against a weaker dollar gaining to ¥92.50 from Friday’s closing price at ¥92.68.  


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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