IB FX View
Dollar starts to give back as equities test 2009 peaks
Wednesday December 23, 2009
Hopes for a strengthening economic recovery lifted global equity and commodity prices advanced by the hope that 2010 will open a fresh and more productive chapter. The current thought process adopted by currency traders is that a recovery will sweep away ultra-low monetary policy and revitalize the yields available on dollar assets and so advance its appeal. Currency investors are therefore ignoring the previous rationale for standing clear of the dollar in the form of a surging budget deficit. When yields were artificially manipulated lower under the guise of quantitative easing, investors blew off the dangers that growing budget deficits might carry. As thin-trading conditions persist towards the end of the year there is a shortage of willing dollar sellers to bail out investors holding short positions who are increasingly pushing the euro and yen lower against the greenback.
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Euro – The euro is slightly firmer in early New York trading after a bad start to the week. With the focus having shifted more towards yield curve movements inspired by better economic data in the United States, the potential for the ECB is restrained by tame core inflation rates. Illiquid market conditions are also exacerbating the move back into the dollar. The highest consumer confidence reading among Italian consumers in seven years from the fourth largest economy in the Eurozone isn’t a big enough factor today to shift the prevailing thought process. In addition the lingering worries over whether more sovereign debt rating reductions will spread to other peripheral Eurozone nations is keeping investors away from the euro, which is trading this morning at $1.4276. The recent sell off has almost cost the euro 10 cents as the 200-day moving average of $1.4192 is in sight.
U.S. dollar – Investors will be watching the second of this week’s housing-related data to confirm recovery prospects for homeowners. Yesterday’s solid existing home sales data helped reduce the inventory supply available for sale to below seven months as home buyers rushed to qualify for the $8,000 tax credit. Improving prospects for the economy are helping spark concerns that the Fed might raise rates, which in turn is forcing investors to rethink short positions in the greenback. Later this morning the Commerce Department releases data for new home sales for November. The dollar index is starting the morning a little lower while commodity prices gain and the U.S. equity market looks certain to attempt a new 2009 high today.
Aussie dollar – Not since the first week of October has the Aussie traded as low as it did this morning. The Aussie is having a hard time shaking itself out of a funk that’s seen it drop from 94 cents to 87.35 today. Since its overnight low the Aussie is slowly regaining its feet and is firmer on the session at 87.67 U.S. cents.
Japanese yen –Tokyo stocks rose for a second day and stayed abreast of gains for global equity markets. The yen rebounded from earlier weakness to as low as ¥91.87 and is currently up on the day at ¥91.69. Late on Tuesday the government announced a further stimulus package aimed at preventing a dip deeper into deflation. Government officials were light on where money would be allocated.
British pound – Minutes from the recent Monetary Policy Committee meeting hardly served to inspire joy and good tidings to the pound sterling this morning. The pound is again lower at $1.5957 against the dollar after the minutes revealed worries over the economic recovery. While on the one hand the MPC could see that weak third quarter data was consistent with greater momentum ahead, it also expressed concern about indications sent up by monetary data. The M4 measure of money supply is used to gauge the effectiveness of the Bank’s quantitative easing process. Recent data showed that the measures are not necessarily taking hold as the Bank would care to see. Weak money growth isn’t delivering respite in the way it should be under these emergency conditions. And while the views of the two dissenting members were brought back into the fold at the December meeting the MPC concluded that there had been some ‘less favorable developments’ emerging since they last met.
Canadian dollar – October GDP data is on tap this morning and it would possibly take a large disparity against the expected data to derail a strong performance all week from the Canadian dollar. Ahead of the data the Canadian unit buys 95.31 U.S. cents and is close to its highest reading in two weeks at 95.45.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
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