IB FX Brief

Dollar making early morning gains as risk revives

Wednesday February 17, 2010

Sterling took an earlier slug to the gut after a shocking rise in the number of jobless claims. Instead of matching estimates of a 10,000 gain in jobs created, investors were disappointed to learn that jobs shed came in at 23,500 for the largest gain since July last year. After its ascent on Tuesday the pound briefly went into reverse falling back to $1.5716 before analysts breathed easier on a glance at the minutes of the February Monetary Policy Committee meeting. Unanimity between members gave investors hope that decision makers are on the same page. The pound is now just marginally lower versus the dollar this morning as risk appetite appears to be returning to markets.


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British pound – There is no hiding the nasty January jobless data today. However, last month the same report revealed a shock drop of 15,200 in the jobless count, which stirred the pound. Today that data was revised down to a gain of 9,600 jobs but still the rise to 1.64 million is the largest number of unemployed since April 1997. A broader ILO survey-measure reckons that the claimant count declined as 3,000 jobs were added. On that basis, however, the rate of unemployment at 7.8% compares to the government reading of 5%.

Sterling investors are rightly concerned that the economic pickup that seemed to be real enough abroad has signaled nothing more than a false start in Britain. Last week’s inflation report from the Bank of England hinted that the nation might need to do more if faced with further declines in activity. In terms of sterling positioning into today’s reports, the market was positioned for discord amongst members but was surprised to learn that all votes were in favor of holding off further quantitative easing until the impact of the stimulus was understood. A division has the potential to be sterling negative and that fact that all players stood on the same stage is a healthy signal for the pound, which is now higher on the session at $1.5795.

Euro – Mindful of a lack of fundamental change in the growing sovereign debt crisis, a spring higher in the value of the euro by some short players created just the excuse for everyone else to bail out of crumbling positions. Others established fresh longs as the market appears primed for a smoking to the upside. The euro could rally as high as $1.40 without much trouble as investors start to understand the strategy of the EU in marginalizing and punishing the Greeks. Currently the dollar buys $1.3715 after a weak housing starts report.

U.S. Dollar – The dollar index looks vulnerable according to some analysts, and should accelerate to the downside beneath an index value of 79.0. Currently the March future is trading higher on the session at 79.88 as investors consider the desirability of the dollar as fears over Chinese tightening subside. The less frantic tone to the whole Greek mess is also benefitting the euro as investors are forced to pare souring positions. The sideshows of the debacle have begun with Goldman Sachs under the witching gaze of the media after reports circulated that the investment bank dealt a large currency swap with Greece. The focus is not on the transaction itself, but the fact that the Greek authorities may have left it out of filings, allowing larger than usual underwriting fees to investment banks. The accusation is that it perhaps attempted to mask the real size of its fiscal deficit.

The dollar faces a minor hurdle later today when the late January FOMC meeting minutes are released from which we will learn deeper insight into the arguments put forward by Thomas Hoenig of the Kansas City Fed, as he voted against maintaining the extended period terminology.

Aussie dollar – Brave Aussie dollar buyers continue to bait the bears as they stick their heads above the parapets with the Aussie resolute above 90 U.S. cents and last trading at 90.32 cents. The Australian dollar has sucked in buyers as the Eurozone furor has subsided with risk returning to the agenda. The rise in commodity prices that the RBA predicted in minutes released on Tuesday continues today, which is another boon for the local dollar. However, the other side of the equation that the RBA also predicted is less transparent at present. The threat of rising prices fuelled by rising demand for Australian exports is generating ongoing speculation that there is another one percent likely to be added to the prevailing 3.75% rate of interest within its economy. After the Chinese Lunar New Year, dealers in Hong Kong had their first chance to react to the additional reserve requirements made by the People’s Bank of China after markets closed last Friday. The Hang Seng echoed activities in Tokyo and rose indicating less fear over the actions of the local authorities.

Japanese yen – A jump in the Nikkei by 2.3% overnight boosted by rising risk appetite had the opposite effect on demand for government bonds and the Japanese yen. The dollar rose to as high as ¥90.97 as traders exited the safety of the yen.   

Canadian dollar – The Canadian dollar had an impressive start to the week and this morning continues to push on Tuesday’s peaks, which already has the loonie trading at its best levels since January 21. The rally for crude and gold prices continue to support the Canadian recovery.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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