IB FX View

Recession fast becoming a fading memory

Tuesday May 12, 2009

Fading memories of the worst global recession in living memory continue to be played out in terms of a weakening dollar as investors pursue opportunities in other currencies and areas where growth is expected to resume fastest. The dollar lost further ground to the euro above $1.3700 for the first time since March 23 as investors begin to discount last week’s repo rate reduction to 1% by the ECB as the last in the cycle. The Europeans also announced a framework for stress testing the region’s banks, which one could argue is a suspicious move aimed at providing a low-hurdle challenge to achieve a popular result. The pound had a strong day as various economic data suggest less bad news ahead.


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The Japanese yen continues to outperform the dollar as investors shift away from the greenback. Today the dollar buys 96.58 compared to 97.40 on Monday. The U.S. trade deficit widened in March to $27.6 billion as the export slump hit a two-year low. A rise in the value of oil imports courtesy of increasing oil prices was more than offset by a drop in American demand for steel and industrial supplies at a time when inventories continued to be depleted in the expense of fresh demand. Foreigners bought the fewest U.S. exports since August 2006 leading to a slump in exports of capital goods including autos, airplanes and telecommunications equipment.

On a positive note and one which bodes well for retailers is the news that imports of foreign cars rose for the first time in nine months. We say this not due to the nasty sequence of events for the domestic auto industry but as one of the green shoots that policy-makers are keen to identify. Imports of consumer goods rose for the first time in five months.

Trade with China was brisk with two-directional trade increasing. Imports from China rose while exports rose to a five-month high as the Chinese government continues to focus on stimulating the consumer sector. Today the authorities announced that it would allow domestic and foreign companies with at least $12 billion in assets during the past year to set up financial consumer lending divisions to the domestic population. The government also announced a January through April decline in overseas shipments of 22.6% compared to the same period a year ago illustrating the focus on its stimulus plan to regenerate domestic activity. At the same time the Chinese government noted that urban fixed-asset investment rose during the four month period by 30.5% versus the year earlier.

The British pound is faring well once again today and reached $1.5350 against the dollar before retreating by one cent as equity prices resumed Monday’s slide. Sterling bulls are staking their claim that the worst of the recession is gone and that the economy is on the mend. Today’s RICS survey said that the number of housing price pessimists was at the lowest reading compared to the number of optimists since January 2008. The British Retail Consortium in its survey of consumer spending said April retail sales were 6.3% higher than the prior month. Finally, the pace of decline in industrial production was the least in 13 months as output fell a mere 0.1% and fell short of less optimistic expectations.

Having slumped against the euro on Monday the pound also recovered and today one euro buys 89.43 pennies. But the currently mighty yen even outpaced sterling and rose today with the pound purchasing 147.05.

Crude oil prices reached the highest since January 6 today as they breached $60 per barrel. Can’t be long now before we start discussing the creeping tax on consumers as what the recession brought in terms of cheaper gas prices gets swept away by the rising tide of sentiment surrounding recovery prospects. But the rebound in commodity prices has played right into the hands of resource-rich nations including Canada.

Today the Canadians announced a trade surplus despite a decline in export volume through March, which was out paced by the decline in imports for the month. The trade surplus grew to C$1.1 billion and aided a rally in the unit to 85.80 U.S. cents. In the case of both the Aussie and the Canadian dollars, traders appear ready and willing to buy into days when risk aversion becomes the focus. We saw weaker commodity dollar prices yesterday on the back of declining equity prices, but the overnight rebound has been notable.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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