IB FX View

Many wise words rattle the dollar

Wednesday September 16, 2009

As we noted in Tuesday’s headline, the dollar rose as retail sales strengthened, although that was a cock-eyed way of reacting in our opinion. Signs of strength for the domestic and global economy have led the to dollar sales thus far and we see little to change the glacial meltdown as the focus shifts back to the budget deficit. Overnight commentary from a veritable line-up of speakers all served to undermine the dollar in some form or another. However, as we write by mid-morning the dollar has stopped falling and has rebounded from its weakest year-to-date value for the euro, while he dollar index is just slightly lower on the day.


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It was words of encouragement from Fed chairman, Ben Bernanke on Tuesday later in the session that revived investors’ appetite for equity. His thoughts indicates that the nation appears to have stopped wading through the molasses when he said that “the recession is very probably over,” caused dollar buyers to rethink their rationale of responding positively to the earlier strong retail sales report.

Billionaire investor Warren Buffett in a note said that his company is buying stocks here gave fresh reason for more investors to do the same lifting the S&P 500 index to dizzy heights. Many are forced now to buy with eyes firmly closed as valuations become richer and there is a sense that the odds are increasingly stacked against purchases at current levels. In order for stock index momentum to be maintained, companies must now demonstrate how to deliver bottom line earnings growth though improvements to revenue numbers rather than through cost-cutting measures. As an aside to this thought, we recall several years ago when stocks were far lower than they are today, when Mr. Buffett could see “few opportunities” worth buying. Will he confirm his role as a contrarian indicator this time around?

Former Fed chairman, Alan Greenspan delivered a video-conference to Deutsche Bank clients in Tokyo. He too felt that the worst was behind for the economy, but could also see the potential for a second-leg down. On the one hand that’s immediately a dollar-negative, but on the other, assuming there is a next-leg down, that could be a dollar-positive. But that is not a factor when equity prices are pushing at the ceiling.

Mr. Greenspan also noted that the dollar was likely in danger should increasing bond issuance lift the national debt. He points to the fact that this will most likely create dollar weakness as a built-in variable.

Staying in Tokyo, soon-to-be Finance Minister, Hirohisa Fujii sounded off about the Japanese yen. The incumbent DPJ party has promised a big spend to revitalize the economy. The outgoing Liberal Democrats focused on exporters and so were fearful of too strong a yen. The DPJ has already stated that their policies will revitalize an economy, which could withstand a stronger currency.

Mr. Fujii said that he’d prefer the government to remain on the sidelines and not intervene in the yen’s value. His opposition to a weaker yen created a surge in its value overnight sending the currency to a nine-month high against the dollar at ¥90.12. The mid-morning dollar rebound lifted it back to ¥91.10.

A report from the U.S. treasury department showed a sharp drop in overseas demand for dollar denominated equities, bonds and notes during July. Net purchases fell to $15.3 billion after $90.2 billion in June. However, we’re compelled to raise the matter of bundles of ongoing bond and note sales during August out of which overseas demand has proven to be a big factor. We also doubt that it’s net overseas equity sales at this point that’s creating fresh market highs.

Rising commodity prices helped put the spotlight back on Canadian and Australian dollars today. The price of gold once again accelerated and reached close to $1,020 per ounce, while crude oil is back above $71 per barrel. The Canadian dollar today buys 93.54 U.S. cents – its strongest reading in a month – after a government report showed the strongest improvement in factory sales in 12 years. Data for July rose 5.5% to $41.4 billion with auto production rising 48% to $3.3 billion.

The Australian dollar rose to buy 87.07 U.S. cents as an index of metals prices jumped 1.1%. Australian commodity production makes up 60% of the nation’s exports. An index of leading indicators compiled by Westpac and the Melbourne Institute rose 1.1% in August helping to shrink the annual pace of decline. The Aussie is now at its strongest versus the U.S. dollar since August 2008.

In Britain, a worsening reading of unemployment helped send the pound lower earlier in the session as it hit $1.6435. Some 210,000 more workers are now seeking work compared to three months ago raising the total to 2.47 million out of work. The pound regained its poise and currently buys $1.6500.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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