IB FX View
Not enough global oomph spurs dollar rally
Thursday August 6, 2009
There were plenty of currency-driving forces on Thursday with central banks meeting and investors gearing up for further news on employment around the world. A Goldman Sachs boost to its 2009 U.S. growth forecast was peppered with caveats and raised more concerns about the future while the European Central Bank wrote off 2009 and predicted next year would be better. The Bank of England meanwhile underscored concerns for the future helping sour a rally for sterling. All in all, a risk aversion type day is creating more support for the dollar, which has risen to $1.4366 against the euro and ¥95.60 against the Japanese unit.
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The Bank of England created ripe conditions for a minor pasting of the pound after it surprisingly boosted its asset purchase program by £50 billion for another three months. Sterling has climbed this year as the economy picks itself up off the canvas, but more recently has strengthened on the view that manufacturing and service sector expansion were well entrenched, raising speculation that the Bank of England might pause its program.
Today’s news in that sense was a bolt-out-of-the-blue and raised the specter of deflation. We’ll learn more when the Bank produces its quarterly growth and inflation forecasts next week, but suffice it to say, the threat from falling prices becoming entrenched clearly presents a bigger worry to the Bank of England than the market presently predicts. That fear is implicitly shared by the Chancellor of the Exchequer who rubber-stamped Thursday’s additional stimulus.
At $1.6806 the pound has lost ample ground against the dollar having risen to $1.7043 mid-week. The Bank used its lunchtime statement to convey to investors that growth in idle resources was likely to continue for “some time yet” and that this would bear down on inflation in the medium-term. So it’s one thing kick-starting the economy but the Bank continues to cast a rather wary eye on prospects for prices beyond immediate stimulus. Some of their task is made harder by the fact that lending conditions still seem awkward with banks maintaining strict lending restrictions in place.
The ECB in its post-monetary meeting statement said not to expect positive growth for the remainder of this year, but that 2010 should be better for the economy. It also predicted that annualized inflation rates would stay negative for a temporary period this year before showing modest rises next year. But the ECB is in no hurry to change its current monetary stance and referred to its 1% lending rate as “appropriate.” The current free-for-all lending conditions to Eurozone banks is encouraging lending and price pressures are indeed muted. Today the German government released data showing a two-year high for factory orders, which rose by 4.5% in June. That leaves orders lower by some 25% since June last year.
The Australian dollar rose to its highest point for 2009 after the employment report showed a surprise increase in jobs added by 32,200 in July, which helped maintain a 5.8% rate of unemployment. Investors had been awaiting the report to show a 6% rate with job losses of 18,000. Once again, the words of Governor Stevens are ringing across the currency markets. The Australian economy is performing better than was feared, but that’s lifted the prospects of an interest rate rise as early as November to a 90% probability according to interest rate futures. We’ll learn more about whether the RBA is raising its growth prospects for the Australian economy when it produces its quarterly update on Friday.
Both the Aussie and Canadian dollars fell from grace throughout the morning as a positive start gave way to losses. The Aussie having reached 84.44 cents pared gains and is currently trading at 83.83 cents. The Canadian dollar is also lower at 92.90 having traded at 93.65 earlier.
Despite the clear thawing in many markets and accompanying signs of life in the real economy, the currency markets today are looking for the next-trick out of the pony. The action at the Bank of England has raised the risks of holding sterling and raised the prospects of worse times ahead rather than better. The ECB is stuttering and will be forced to rewrite its 2010 outlook if growth sputters. The Australian economy won’t remain immune if the rest of the world doesn’t grow and we’re fast learning that falling prices can’t be wiped out with all of the idle capacity lying around. It’s hardly a recipe for success and the menu looks that little less appealing than investors hoped to feast on earlier in the week as they ditched the dollar, which appears to be finding friends once again today.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
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