IB FX View

Equity market loss of momentum helps buoy dollar

Thursday October 1, 2009

For want of a better direction today the dollar is advancing, spurred in part by comments from ECB top-dog, Trichet who made reference to currency volatility. That’s a polite way of complaining about strength in the euro as the dollar suffers from the fallout of growing risk appetite. Investors are scaling back dollar short positions in the event that concerns over the dollar’s health and role might be raised at this week’s G7 meeting. 


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Some other data may have helped tipped Thursday into a dollar-day rather than a euro-day too. Seasonally adjusted German retail sales data was extremely lackluster for September. Investors expecting a gain of 0.2% were woefully disappointed by a decline of 1.2% for the month. We doubt that Mr. Trichet’s comments bear any relationship with today’s sales data. Indeed a more favorable exchange rate cheapens the cost of importing American goods. Rather it’s the overall health of the state of the consumer that leads investors today to tread cautiously over holding a euro that would benefit at the expense of the dollar should recovery strengthen.

In the U.S. the weekly reading of initial claims disappointed investors after a sharp decline in the previous week. Investors would be more willing to embrace recovery prospects if the labor market would stop shedding workers. The September report is due in 24 hours and investors are hoping for a low count of job losses before they will buy deeper into an earnings recovery.

The euro eased to $1.4561 – about a half cent lower than Wednesday’s closing level. Earlier in the week other dollar-friendly comments emerged from Japanese officials in reference to the role of U.S. treasuries in its international reserve holdings. The tone from Mr. Trichet today was enough to slow the appeal of the euro.

The British pound is largely unchanged against an otherwise strengthening dollar after the IMF boosted its 2010 growth forecast for the U.K. The pound is at $1.5976 and is beating back the euro, which today buys 91.13 pennies. The IMF had predicted growth for the British economy at a meager 0.2% pace back in July and today raised that forecast to 0.9%. The pound trailed other currencies in the third quarter as a result of a lackluster outlook, dropping 7.5% against the euro and slipping 2.9% against the dollar.

The British PMI survey out today showed that September’s manufacturing activity failed to break above the expansionary 50 line. The reading slipped from 49.7 in August to 49.5 last month, again disappointing investors looking for confirmation of better things ahead.

The Chinese PMI survey managed to maintain its impetus adding to August’s evidence of expansion at a 54 reading with a 54.3 measure for September. Meanwhile an Australian industry group showed that the domestic manufacturing index was at its strongest level last month since December 2007.

The Aussie dollar is losing some ground today at 87.80 U.S. cents despite its seemingly endless ability to post fresh intraday peaks. The Canadian dollar is also marginally lower today at 93.18 U.S. cents.

The dollar is ceding a little ground to the Japanese yen at ¥89.62, while the yen has also added to ¥130.39 against the euro. The appeal of the yen today is possibly more related to risk aversion than in response to the quarterly Tankan survey compiled at the bank of Japan. For the second consecutive quarter the Tankan showed improved confidence among big businesses. The headline composite index reading of -33 compares to -48 at the end of the June quarter. The record low reading took place in the March quarter, were pessimists outweighed optimists with a reading of -58.

Still, there are signs of excess capacity at many companies, which confirms that few fire on all cylinders as the global growth spurt passes through. Many feel that the current spurt might run out of steam and recognize that stimulus efforts from Japan, China and the U.S. are responsible for the wave of current optimism.

An acceleration of planned spending cuts by Japanese companies through year-end was reported in the Tankan and one has to wonder how this will play out in the face of a strengthening yen.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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