IB FX View

Dollar simmers

Thursday July 16, 2009

There is just a little bit of risk aversion playing out via the forex market today after a strong run for equity prices has been checked by a series of peripheral incidents reminding investors that the woods are still very much in front of us and that recovery comes at a price. The yen is the main beneficiary, while the dollar has stopped falling after yesterday’s decline, which saw commodity prices jump on recovery hopes and reinforcing dollar weakness.


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

We don’t wish to diminish the serious nature surrounding the prospect of New York-based commercial lender, CIT’s possible bankruptcy, which is indeed weighing on equity prices this morning. The company itself stated the low likelihood of impending government aid, while the NYSE suspended trading of its shares early yesterday. A year ago this might have been a further critical heavyweight component suffocating investor sentiment. But today the government clearly feels that investors and businesses can absorb the impact of this potential downfall. Investors have ever-so slightly bid higher the Japanese yen, which stands currently at 93.42 against the dollar and 131.79 against the yen.

The equity market seems to be treading water after a 250-point Dow Jones industrials average rally on Tuesday almost waiting for the axe to fall. Commodity dollars are broadly lower as more peripheral reminders about a sustainable recovery emerged.

New Zealand’s economy has finally shown signs of improving according to the government and central bank after both were rather reserved about this during recent months. However, the cost of implementing its domestic financial stimulus plan has left the nation with a deficit equivalent to 8.5% of its GDP. Now Fitch Ratings agency says that, while this is a large enough budget position, New Zealand may need more stimulus, which in turn would worsen the situation. As a result Fitch cut its outlook for the country’s long-term credit rating and the New Zealand dollar declined. The only silver-lining here is that both the Reserve Bank and the government might approve of a weaker currency as far as exports goes, it won’t welcome the stain on its credit record. Of course stronger global growth meaning no need for further fiscal spending would help scratch the record.

In neighboring Australia the central bank revealed that it took advantage of an average Aussie dollar price of 80.19 U.S. cents throughout June to sell a record amount of its own currency. Data shows that the RBA sold A$1.9 billion throughout June, its largest amount since February 2004, and more than May’s A$1.4 billion worth of sales. The Aussie dollar is off a little today and hovering around that same average price. Dealers will now think twice about the potential for sustained appreciation above 80 cents, which might harm the pro-growth appeal of this commodity dollar.

China confirmed second quarter economic growth of 7.9% through June, after a 6.1% performance in the first. Aggressive lending has helped property and stock prices rise dramatically this year following the November stimulus plan from the Chinese government. While industrial metals are trading higher this morning on hopes that this might be sustained, as we note above the commodity dollar rally is fading.

The Canadian dollar is weaker in line with declining energy prices, which are surprisingly not taking a lead from the Chinese growth story. The Canadian dollar today buys 89.34 U.S. cents having reached 90 cents yesterday, a five-week high. Gold is also slightly weaker and along with creeping risk aversion is forcing some profit-taking at the very least in the loonie.

In the United States the employment picture brightened somewhat with the weekly jobless claims figure coming in at a slightly lower 522,000. Partially offsetting the marginal improvement is the release of data showing that 1.5 million or one-in-84 households are at some stage of mortgage default according to data from RealtyTrac. The numbers are a reminder that no matter what’s behind us there remains and will remain for quite some time a grim picture of rising unemployment, crippling consumer spending ahead.

The dollar is relatively steady today. One euro currently buys $1.4112 and the pound buys $1.6425. The dollar index is slightly higher on the day, but is clearly toying with the notion of challenging early June support.

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.