IB FX View

Philly Fed survey roils dollar

Thursday June 18, 2009

A surprise jump in the Philadelphia Fed report of business expectations was taken as a complimentary measure in support of the first downturn in continuing jobless insurance claims. The dollar, which was already having a sloppy session, turned decidedly lower and hit $1.40 against the euro. In the same vein the dollar beat back the yen, which is suffering on the crosses as risk appetite returns. The dollar is back to 96.28. As the day wears on it will be interesting to see whether or not the market needs to simply get this dollar-bashing out of its system or whether this is the start of a new leg down for the dollar. We rather think the market is shaking its leg.


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The Philly Fed survey was due to come in at -17.6 for June after a -22.6 reading in May. The ongoing demise of negative numbers indicates a thawing of conditions. No one expected a shift close to zero. Earlier on data in the session the dollar initially wobbled despite the fact that jobless claims continued to come in at a reading of more than 600,000. But the big shocker here was the fact that the series of continuing claims had its first decline since January and fell by a sizeable 148,000. The news confirms commentary in the recent Fed beige book of regional business conditions in that some districts found a moderation in the number of job losses.

About 15 years ago, visitors to Britain could flip over the old 20 note to see the depiction of William Shakespeare on the back. One of the Bard’s famous quotes appears to playing out to the frustration of the Bank of England. He once penned the warning, “Neither a borrower or a lender be.” That’s a very fitting observation and a similar report came fro the Bank yesterday as it noted “subdued demand” for new loans in what remained a “very weak” demand for loans. Lending amounts trawl along the bottom at a nine-year low, while gross mortgage lending in May fell 2% and raise our suspicions about both the validity and sustainability of recent reports concerning rising home price values.

Earlier, the ONS reported a surprise decline of 0.6% for U.K. retail sales in May. The pound is losing the steam from its sails at the end of a quarter in which it could apparently do nothing wrong. Not even political turmoil could unseat the jockey. The pound today fell to $1.62 before rebounding to a current $1.6325. Against the euro the pound is also losing steam at 85.48 pennies.

The subject of central bank intervention has also heated up in the current quarter. Such has been the degree of dollar weakness, at least until about two weeks ago, that it had us wondering whether there was a case for banks ditching their own currency to steady the greenback. We have two indications today of central banks intervening.

The Swiss franc is the more curious story and we’ve covered it before. The basic fact is that the traditional safety aspect of the Swiss franc left it rising high against the euro and of course sending Swiss manufacturers right down the pan. Three months ago the Swiss National Bank (SNB) dealt with this by, first, telling the market that it might sell francs and buy euros and second, by going right back to their trading desks in Zurich and following through. The intervention from memory was one-off and had the desired effect albeit temporarily.

Two Swiss speakers today, Thomas Jordan and SNB chief Jean-Pierre Roth, stated that while there was no one particular line in the sand that the market should worry about crossing, the SNB would act to stem unwarranted Swiss franc strength. So, speculators took this as a relaxation of the terms of the deal pushing the euro down a notch to challenge Sfr1.5008. But within hours, unconfirmed Swiss franc sales drove the euro back to buy Sfr1.5139 leaving buyers of Swiss francs nursing losses on the day. It doesn’t change anything as far as trading psychology goes. If the SNB turns up once a quarter to mop up its own currency and for the interim investors can buy it without worry, it would seem an easy trade.

Commodity and currencies related to them have had a blast this quarter rising at the headiest pace in many years. Some of this is a rebound from oversold conditions while other investors see growth emerging fastest in those nations where raw minerals are vast. The Australian dollar has been the biggest play recently having risen from 60 U.S. cents to over 80 cents today. In a sense buyers have been climbing the proverbial wall of worry the higher the Aussie goes. Earlier today the Reserve bank let loose that it had sold the largest amount of its currency during May since 2004. Since the announcement dealers have recovered their poise, but to us it seems that this wall of worry just got another layer of bricks at the top.

Canada’s central bank chief has recently chided the appreciation of the local dollar for the potential it has in snuffing out nascent recovery. Inflation numbers today allegedly lifted the unit to 88.66 U.S. cents, although on a year-over-year rise of 0.1% we don’t see this data bringing forward any rate rises from the Canadians.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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