IB FX View

Euro listens out for ECB wisdom

Thursday January 14, 2010

Having reached a one-month high midweek against the U.S. dollar, the euro is hovering above $1.4500 in early Thursday trading awaiting the outcome of the monthly ECB meeting. While there is no change to interest rate settings expected, investors eagerly await policy makers’ approach to the progress or plans of the government of Greece in tackling its double-digit budget deficit. The currency market seems less inclined to follow the line that, while hardly isolated, wayward peripheral fiscal policies are insufficient to uproot the single European currency.

Meanwhile the seeds of Chinese growth once again bloomed in neighboring Australia’s backyard in the form of a buoyant employment report, putting risk appetite firmly back on the agenda drawing the Aussie dollar a step closer to its 2009 peak. The response is diametrically opposed to that of just two days ago when the unit was dumped over fears of the impact of a tighter monetary regime in mainland China.


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U.S. dollar – The Fed’s so-called Beige Book report revealed precisely what I predicted ahead of its release, namely ongoing evidence of a modest rebound. The report simply repeats previous readings of cautious optimism spreading across more of the Fed’s districts. In the sense that investors have in the past been accustomed to sharp upward surprises when U.S. growth gains traction, the contained nature of the current recovery is not turning up such surprises and will possibly constrain the dollar’s performance. New York Fed president William Dudley reiterated in an overnight comment that he’d prefer to see more evidence of firming economic activity before acting on interest rates. Later today the market faces U.S. retail sales for December and the latest weekly installment of initial jobless claims data.

Japanese yen –The yen resumed its weaker tone following on from midweek losses. Earlier in the week the yen was bid as investors were swift to close short yen positions used in order to fund higher yielding bets elsewhere around the world. The tremors felt from the Chinese central bank’s efforts to restrain lending through a gradual policy of raising short term auction rates on government debt and increasing deposit requirements across the banking system forced a radical and apparently short-lived jump into the yen. Today the yen is lower against the dollar at ¥91.80 while it weakened against the euro to ¥133.05. Spreading risk appetite is best exemplified by the performance of the Aussie dollar against the yen. Recently the Aussie surged to ¥86.25 only to fall from grace this week to a low of ¥83.36. Today the Aussie jumped to ¥85.30.       

Aussie dollar – Our data shows the Aussie traded at 93.29 U.S. cents immediately after the statistics bureau revealed the addition of 35,200 jobs in December making for a fourth month in a row in which jobs were added. The rate of unemployment slipped from a downwardly revised reading of 5.6% to 5.5%. The only dark cloud I can see in this data (and that’s stretching it) is a shift away from full-time to part-time job creation.  

Canadian dollar – Buoyant commodity prices in the aftermath of the Chinese measures to cool growth are keeping the appeal of the Canadian dollar very much alive. The unit has been pushing above 97 U.S. cents in an effort to gain ground but sell orders seem to be limiting gains.

British pound –The pound reached $1.6313, its highest in around one month, earlier as sentiment continued to warm towards it.

Euro – The euro was apparently in demand in the overnight session from Asian sovereign names according to market sources. A firm reading of industrial production didn’t harm appetite either. However the euro at $1.4493 is well off its overnight peak of $1.4556.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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