IB FX View

Now what?

Wednesday October 7, 2009

There feels to be a numb sensation in the currency markets on Wednesday after a rip-roaring session the day before when commodity markets and related currency pairs had the flames stoked beneath them. The weakness in the dollar appears to have died down for the immediate future after a Fed official raised the salient benefits of removing monetary stimulus, while tales of Asian central bank intervention to bolster the greenback surfaced. The dollar-bear party may be over temporarily.


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The dollar strengthened to stand at $1.4690 during mid-morning trading against the euro, although that’s off its earlier vantage point at $1.4659. The dollar has also strengthened against the yen to ¥88.96 having earlier reached an eight-month low-point just above ¥88.00. According to finance minister of Japan, Hirohisa Fujii in his WSJ interview, the recent gyrations in the value of the yen are not sufficient to bring about concerns at the Bank of Japan. This would appear to be a green-light for currency volatility players to rev up the engine in the expectation of more violent swings looking ahead.

Kansas Fed governor Hoenig yesterday stopped short of advising  that the Fed carbon-copy the Australian central bank’s earlier move in lifting its policy settings, but did remark that the Fed would be well-advised to act. He said, “My experience tells me that we will need to remove our very accommodative policy stance sooner rather than later.”

Investors reacted by cutting off the flow of funds to high yield destinations. Despite a positive session for Asian equities as they caught up with Tuesday’s North American gains, demand for risk has petered out midweek raising that “what next?” sensation above the dollar.

Adding to the weight of arguments for not selling the dollar today where reports from bankers who noted unconfirmed dollar purchases against Asian currencies during the past couple of sessions. Of course rising regional currency values detracts from any recovery helping to at least partially offset the benefits of economic growth.

The commodity rally of yesterday continued to lift the high-water mark for the Canadian and Aussie dollars earlier today, but that ocean swell has subsequently abated as dealers booked profits. The Aussie has eased to buy 88.83 cents and so marginally down on the day, while the Canadian dollar currently buys 94.34 U.S. cents. Thursday’s Australian employment report largely becomes a moot reading in the aftermath of the RBA’s decision to lift policy already.

While the rate of unemployment is expected to reach 6% if employers shed the 10,000 workers as economists predict for September, the data won’t be a big market mover unless the report leaves the RBA with egg on its face. A far weaker employment reading could conceivably unwind some of the future interest rate rises baked into the pie and undermine the Aussie unit. However, given corroborating data recently on the health of its economy, this has to be a low probability play.

The pound continues to decline versus the dollar at $1.5896 although it has taken back some ground against the euro today to stand at 92.27 pennies.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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