IB FX View

Risk dilemma

Thursday June 25, 2009

Confirmation on Wednesday from the FOMC that it would continue to but $1.75 trillion mortgage and government notes during 2009 provided something of a relief for the U.S. dollar after the announcement. The Fed’s marginally more upbeat tone addressing an ongoing improvement in the economy saw investors buy dollars. This action was at odds with what is generally being taken by the market as an improvement in risk appetite. The Japanese yen edged lower, while the dollar gained in some quarters. That creates something of a risk dilemma and we have to question whether investors are gaining more faith in U.S. based assets than Eurozone assets. The gain in currencies typically associated with risk trades unusually has thus far failed to include an exit from the dollar.


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While the FOMC might have sounded entrenched in its previously announced action, Thursday’s employment data muddies the picture somewhat. Revisions to earlier versions of jobless claims data coupled with an unexpected rise in last week’s reading to 627,000 claims for unemployment are an ugly pair of ducklings. The upshot is that continuing claims are not abating as appeared the case last week and coming gin today at 6.74 million, the reading is just 97,000 claims off its May 29 peak. The ongoing automakers’ furlough will likely pad out further unhealthy rises in the weekly data and could challenge what was taken as a peak to continuing claims during July.

The dollar continues to perform well against the yen this morning at 96.20 as investors see less need to hold safe haven currencies. Compounding that movement is a rally in euro/yen to 134.10. The yen lost ground against all of the majors today as ‘risk-on’ appeared on traders’ calendars. According to Ministry of Finance data released earlier in the day from Tokyo, during the week ending June 20, Japanese investors favored overseas securities, stocks and bonds to the tune of $3.5 billion. That’s the net equivalent outflow of investors’ capital beyond inflows derived from the sale of those comparable assets.

Yesterday’s rally in the dollar was in part due to a rise in the value of the dollar versus the Swiss franc after it became abundantly clear that the Swiss National Bank was selling its own currency. Swiss exports produce half of the total output of that nation’s GDP and the SNB has been vociferous in publicly stating the problems caused by too strong a franc versus the single European currency. Yesterday marked the first time the SNB dragged the dollar into the equation and bought it to sell Swiss francs. Today the dollar is weaker at Chf1.0670 while euro bulls appear to be running shy of the mighty SNB with euro/Chf at 1.5305.

Perhaps this, ‘yes, we really mean it this time’ act of intervention from the Swiss is one of the reasons behind the poor performance of the Canadian dollar, which continues to give ground back to the dollar at 86.34 U.S. cents. For some time now the Canadian central bank has been warning over the perils for the economy from the stranglehold imposed by a rising domestic currency. Along with a declining price of crude oil, which is a large Canadian export along with other raw mineral resources, the Canadian dollar appears nervous about the potential for intervention now that the Swiss have set a precedent.

Meanwhile, its partner in crime on the commodity front, the Aussie dollar continues to recover against the dollar. Earlier in the week the IMF downsized its prediction for 2009 contraction for Australia and boosted its outlook for 2010 growth. The Aussie is trying to close the week back above 80 U.S. cents and today has added to gains made earlier in the Asian to stand at 79.78 U.S. cents.

The British pound is sharply lower against the dollar at $1.6285 as European area stock markets are lower. Comments out of BoE governor, Mervyn King referred to emergence from Britain’s recession as a ‘long, hard, slog,’ which is a far cry from the optimism cited during a visit to Southampton last week. The euro is also higher versus the pound at 85.47 pennies.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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