IB FX View

Dollar marginally firmer in quiet trading

Monday June 29, 2009

Investors should expect a quiet week heading into the July fourth weekend. The U.S. dollar is ever-so slightly firmer having turned up from a dreary start. Over the weekend a Chinamoney Magazine article surfaced with a submission from the international payments department head at the Peoples’ Bank of China in which he expressed the opinion that the U.S. dollar would likely retain its dominance as a the global currency of choice. We have a euro buying $1.4050 and a dollar buying 95.40 so far today.


Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

We noted on Friday that the widely-carried article Friday from PBOC governor, Zhou Xiaochuan was likely prepared some time ago. It formed part of a 2008 review and stated his vision for a super-currency that would replace the dollar. So today’s seemingly contrarian view from inside the bank arguing that the dollar would retain its dominance is simply an observation that international trade will continue to be carried out and settled using the dollar. There is no inconsistency within either commentary.

Overnight the Japanese yen continued to lose ground following two reports. The first showed a May drop in retail sales of 2.8% while the reading for industrial production showed a sizeable 5.9% rise over April’s data. The biggest detractor against holding the yen right now continues to be a worsening deflationary environment. As such domestic investors continue to take steps to sell yen and invest overseas. The recent quarter has seen the yen lose out across the board with losses against the Brazilian real and South African rand running at about 15%.

Continuing to boggle the mindset of investors is the performance of the British pound. Today the pound buys $1.6525, yet investors seem to feel happiest about advancing sterling whenever they get the chance. Today the pound is a little stronger against the euro where one euro buys 94.98 British pennies.

A CBI survey today seems to have brought support for the pound. In the bigger picture investors seem to have taken the view that the Bank of England and government have done a good job in the size of the steps taken to rescue the economy from a collapse in the financial sector. In that regard, investors seem to favor a return to health for the financial sector and then the broader economy. With the pound having suffered last year on the view that the economy was doomed, the apparently water tight actions by the authorities are aiding a revival in the pound with some institutions saying that the recent 20 cent rise in the pound’s fortune’s versus the dollar marks only a pause of half its journey.

The survey today still points to ongoing job losses across the financial sector where some 13,000 are expected to be shed in the third quarter. The chief driver appears to be the ailing revenue stream at the nation’s banks. According to Bank of England data the revenue decline is the worst since that of the quarter ending March 1991, with anemic loan demand and approval hammering home the point.

Net mortgage lending rose by 324 million in May, marking the lowest advance since record-keeping began in 1993. One observation from the CBI survey was the uncertainty over bank funding. This plays right bank into the current lending picture. Banks are only writing mortgages to the safest borrower, which in turn is holding back any housing market recovery. Meanwhile, fierce competition exists in the retail deposit market for customers’ cash. Still, investors buying into the current deal clearly feel that the advances in the British economy since the stabilization measures started warrant holding on to sterling.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.