IB FX View

Russia back peddles over role of dollar

Monday June 15, 2009

This weekend’s G8 meeting in Italy produced a lengthy communiqufrom the world’s leading economic super powers. The statement was cautious in tone and embodied the main event of the discussions. The caution stemmed from the need to make the recovery in demand and the fragile business and consumer confidence longer lasting in nature. The sideshow, however, that stole the currency headlines in early trading was the interview with Russian Finance Minister, Alexei Kudrin who towed a rather different line than the thoughts offered earlier by President Medvedev. The euro has given back a cent and a half already and at $1.3850 is trading closer to Goldman’s stop-loss of $1.3720 than clients must be happy with.

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The Kudrin interview was another solid building block in the wall of defense that the dollar seems to be building. He basically reiterated the words uttered late last week by the Japanese government official in that the U.S. fundamentals were in “good shape” and he expressed confidence in the U.S. currency and that it was too early to start discussing dollar alternatives. The dollar index is once again sharply higher at 81.32 for a near 1% gain on the session. The pound is down to $1.6350 while the Aussie and Canadian dollars are both in the red buying 79.85 and 88.50 U.S. cents respectively.

The dollar only momentarily ceded any of today’s gains after a couple of pieces of U.S. data earlier. First, international investors in April bought far less U.S. dollar assets than predicted. The net $11 billion stake holding added across notes, bonds and equities of American companies was far less than the estimated $60 billion. Second, the New York regional manufacturing survey for June came in with a worrying reading showing a contraction rate at -9.4. Why does this cause us worry? Well, while we’ve become accustomed to contraction, investors have welcomed it warmly in recent weeks because the contraction has been coming in at a lesser pace. And that’s globally rather than in isolation. Today’s EmpireState reading is lower than forecasts and lower than May’s contraction at -4.55. The concern is of course that the initial boosts from the credit-thawing process coupled with jubilation over government stimulus packages might have run its course. And that ties in with the ongoing central bank and G8 tone as constantly relayed when these guys speak publicly.

The Eurozone unemployment rate is expected to average 9.9% for the whole of 2009. Data today confirm that’s where the 16-nation region is heading when the number of payrolls dropped by the end of the first quarter by an alarming, not to mention record pace of 0.8%. You won’t find a larger jump in the 14-year data history. Unemployment reached 9.2% through March, while the current growth contraction at an annualized 4.6% prods economists to stand by 2010 predictions of 11.5% unemployment.

Britain’s Daily Telegraph carried an interview with the president of Germany’s Chamber of Commerce and Industry. The trade group is scheduled to reveal its latest findings of members’ views later this week. According to the newspaper, one in three of Germany’s largest companies are facing tightening credit conditions if, that is, they can find credit at all. The group’s president stated that borrowing conditions were tougher today than at the peak of the credit crunch. That tells us a lot about the prospects, or lack thereof, for recovery for the patient going forward.

Elsewhere, a story in the Financial Times over the weekend seems to carry a torch for the Fed’s views on the recent bloodbath in interest rate markets. Of course the Fed is keen to carry a ‘no-change’ message as far as the eye can see, while the markets last week poked a stick right into its cornea. Bonds and interest rate futures continue to recover their footing and that’s again supportive for the dollar, while equities continue to feel a cold shoulder from investors.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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