IB FX View


Monday July 20, 2009

The creeping uncertainty with which the drama unfolded as CIT headed for near-bankruptcy last week cast a cloud over investors who would otherwise have been game-on for a rally. The surprise eleventh-hour reprieve courtesy of bond holders has apparently given the financier time enough to restructure its debt outside of a Chapter 11 filing. Wall Street has let off an enormous cheer as a result, which is evident in higher equities and a return to risk appetite sending the dollar notably lower as investors buy into yields and riskier assets.


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The U.S. dollar has fallen to its lowest level since the start of June as a result of this sudden bout of enthusiasm. The notable factor this time around as investors send foreign bourses higher is not a sense of disdain for the dollar. Rather it’s that the world appears a safer place and that expansionary opportunities may exist outside of American shores.

The dollar is trading lower against the euro at $1.4218 as investors appear more willing to side with the European currency on the hopes that the stimulus package from the U.S. will benefit the Eurozone equally without the EU having to resort to fiscal imprudence. In simple terms there will be less mess left to clear up in the aftermath. Investors appear willing to make that leap of faith that the recession has been left behind for good.

The pound is also sharply higher against the dollar and is making advances against the euro. The pound buys $1.65 while one euro buys 86.21 pennies after a leading real-estate agency said that asking prices for British homes rose in July. The data appears more convincing in light of gross mortgage lending data from the Bank of England today, which showed an increase over May of 17%.

The dollar is stronger against the Japanese yen at 94.54 as common sense dictates that if risk aversion is waning, the most obvious victim would be the Japanese yen.

The Aussie and Canadian dollars are flexing muscles quite nicely on the predictable gain for energy and other commodity prices – crude oil is back above $64 per barrel. A Canadian dollar buys 90.30 U.S. pennies while the Aussie busy 81.14 cents. Investors may reach for commodity dollars with a little more confidence over and above carry trade rationale in this climate given the prospect that as growth stakes its claim, central banks are less likely to consider intervening to stave off claims that such strength is strangling recovery.

In all, the markets are off to a great start for the week where an overwhelming theme is return to risk. However, traders should be warned that the technical situation accompanying at least the euro’s rally is starting to run out of steam. Today doesn’t feel so much like a knee jerk, but one senses that it’s one of those days when everyone collectively decided that the scene was so perfect that they’d all set off early for the beach. Take a peak at any of the major technical indicators on daily charts to see that the euro’s rally is really lacking technical support.

It may turn out to be one of those days (or at least weeks) when the smart move is to travel in land when the coast roads get choked up.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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