IB FX View

Morning after syndrome

Tuesday August 4, 2009

There was some sense on Tuesday of that ‘morning-after’ feeling in the currency markets. Traders seemed to resign themselves that they may have overdone things the session before and a reversal of fortunes was appropriate. Except for the fact that the dollar is performing poorly at present, the picture remained unchanged. A decline in global equity markets in advance of the North American session created demand for the Japanese yen. Weakness in commodity markets due to light profit-taking and that morning-after sensation saw commodity dollars lower as investors took a step back from an inevitable pause after a four-day winning streak.


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The euro is pretty much unchanged at $1.4416 versus the dollar on a mixed offering of news items. Eurozone producer price data for June showed the weakest reading on record since 1981 data began with a 6.6% decline. In a sense this is old news, with Monday’s stories showing glowing global improvements in manufacturing intentions, which will surely capture the Eurozone before the growth spurt is done. The euro reacted positively to data showing a jump in pending U.S. home sales as currency traders continued to drive the U.S. currency lower in response to positive domestic data underlining a rebound in activity.

However, earlier data for June showed a 1.3% decline in personal incomes equally offsetting a May advance of the same magnitude. Spending when adjusted for inflation actually declined 0.1% leaving investors concerned that, despite the consumer’s appetite for new cars brought on by the “cash-for-clunkers” program, the path ahead is likely to be akin to wading through molasses. Consumers facing ongoing job layoffs are still more likely to save rather than spend in order to alleviate immense debt burdens.

The dollar declined to 95.19 against the Japanese yen as speculation swirled that such recent weakness had created an incentive for domestic companies to repatriate overseas earnings at a premium. The euro gave some ground up to the yen also and eased to 137.07.

The muted tone today was compounded on a couple of fronts. After reporting an unexpected semi-annual profit yesterday, HSBC boss, Stephen Green told Bloomberg television not to expect a large economic rebound. He spoke about anemic economic growth once the bottom was passed. In that sense one could accuse keen investors of getting ahead of themselves.

In Australia currency investors reacted positively to a second quarter jump in retail sales to a 2% rate, while home prices in the eight capital cities rose at a pace twice the predicted amount in a survey showing a 4.2% increase. However, hopes for a stronger Aussie dollar resting on a more restrictive monetary policy were dashed after the reserve Bank left interest rates unchanged. Moreover its accompanying statement was far more downbeat than recent reports from governor Glenn Stevens. Today’s assessment predicted a more “sluggish” economy ahead.

“The more likely outcome [for the Australian economy] in the near term is a period of sluggish output.” The commentary is far more bland than Mr. Steven’s note that seemed to infer that the Australian’s really hadn’t been impacted as they’d earlier thought by the tumbling economy. The Aussie today buys 84.03 U.S. cents.

The ease in the price of crude oil partially caused the Canadian dollar to pull back to 93.28 U.S. cents ahead of data revealing the number of approved building permits last month.

The major exception to today’s pullback is to be found in Britain where the pound continued to blast northwards against the dollar piercing $1.70 at one point, while also gaining to 85.18 against the euro. The catalyst continues to be speculation whether the Bank of England will now at least temporarily pause its asset purchase program on Thursday when it unveils policy changes at its monthly meeting. Speculation mounted following a further expansion in the broad M4 monetary measure accompanied by a weaker pace of contraction for the construction industry. All guns are seemingly blazing in the U.K. at present.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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