IB FX View

Dollar safe haven wanes as U.S. stocks steady

Wednesday August 19, 2009

It was on August 4th that Canadian finance minister, Jim Flaherty warned reporters over the potential need for unspecified steps to calm the rise in the Canadian dollar. We had no idea that he meant awakening the Chinese bear and provoking a 20% decline for Shanghai stocks. And thanks to the global inter-linkages that pervade markets these days, demand has subsequently been thwarted for Canada’s dollar, for copper, for crude oil and for risk in general. Mr. Flaherty can now hand the microphone over to his political friends in Tokyo, who have far greater need for some medicine to calm a raging yen as investors once again seek safe havens.


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We should know how serious the current equity market drama is by mid-afternoon in New York. After Monday’s crushing decline in equity prices, Tuesday’s rebound made suckers of sellers, while Wednesday’s drama might turn out yet to be a nonevent.

Shanghai stocks closed with a 4.3% loss, after reaching a 5.1% intraday decline, which put the market into official bear territory with a 20% reversal from the early August peak. At that point the stock market had more than doubled from its October 2008 lows and today stands 50% lower than its October 2007 peak. Risk aversion continues to show up in bond market strength as yields slip lower, while commodity prices are feeling the ramifications of a contracting pace of bank lending within China, likely to reduce expansion in the coming months. Risk aversion saw weakness in the Aussie dollar, which declined to 82.39 U.S. cents while the Canadian dollar fell to 90.17 U.S. cents. The latter has faced two lower weekly closes since Mr. Flaherty’s comments and the unit is down from 93.23 cents at that time.

The euro is picking up steam in mid-morning trading against the dollar at $1.4160 as U.S. equity markets don’t feel the same need as European markets to follow-through on Asian weakness. The pound remains lackluster against the dollar although off its $1.6375 base from earlier. Currently the pound buys $1.6443 after the Bank of England’s minutes revealed a division in the amount of quantitative easing the MPC voted on. At the time of the meeting the MPC surprised the market by providing a further £50 billion to aid credit within the financial system. Governor King’s vote for a larger amount of £75 billion undermined the pound today as investors continue to figure that the Bank is less optimistic about the strength or sustainability of British economic recovery.

There are two stories out this morning that poke at the holes in the future of the dollar’s life raft. A New York Times editorial comment from billionaire investor, Warren Buffet points out all the typical ailments of the dollar and in particular the post-recovery problem of the unintended side-effects of the U.S. governments stimulus spending spree.

Bond fund manager, Pimco, also discusses the likely loss of the dollar’s reserve currency status noting that emerging market currencies are likely to fare well against the greenback. The U.S. dollar is in the slow lane as it continues to bid in the race for the title of global reserve currency. However, it recognizes that there is no heir apparent at this time. Despite the fact that Asian stock weakness is crucial at this time, Pimco argues that a weak political system detracts from leaving the Japanese currency as emergent unit worthy of reserve status.

Neither article is a story for today’s risk aversion setting. The dollar index is a tiny bit lower on the day and stands 2% off its weakest point of early August when indeed equity markets were fully discounting calm seas ahead.

The Japanese yen moved sharply ahead against most major currencies today. A mid-morning surge appeared to shake out some bearish positions as stops were triggered sending the dollar down to as low as ¥93.75, while the euro gave way to ¥132.19.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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