IB FX View

Sterling slides, while euro plays second fiddle to dollar

Wednesday August 26, 2009

Bursts of enthusiasm here and there don’t seem to be enough to carry a single currency unit higher in current trading. The hardest thing today is dissecting the dollar’s rise between positive domestic forces and those weighing on the backdrop of global growth rooted in Asia. While rising American durable goods orders and sales of new homes helped float the dollar once again today, better news from Germany seemed to have little lasting effect on the euro. Meanwhile it raised the specter that the British economy is fast becoming a laggard causing investors to shun the pound sterling. Once again the under tow is created by rumblings out of China in the shape of efforts aimed at calming rampant but spurious domestic production.


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The euro is currently weaker against the dollar at $1.4236 despite a fifth monthly rise in the Munich-based IFO institute’s German business confidence survey. It rose to 90.5 in August from 87.4 in July based on the responses of 7,000 German executives. The optimism within the survey coincides with an 11-month high for the Dax index of German stocks lately.

Investors are now scrambling to revise 2009 growth forecasts, which look overly bearish at a 6% contraction. Officials are starting to muse over this stance and we’ll need to await any revisions to the surprise second quarter GDP data at the start of September. The conservative European fix to the financial meltdown currently appears to be triumphing over the aggressive hands-on fix by British counterparts and with investors left second-guessing changes to the value of the U.K. housing stock as the best clue to whether growth is back investors are fast losing patience with this economy. The pound could be headed as low as $1.55 before data shows signs of life.

The pound sank to $1.6159 earlier against the dollar making the recent excursion to above $1.70 look like a wrong turn. Against the euro the pound declined to 87.80 pennies for the weakest reading in around 10 weeks. The pound certainly looks like the poor relation at this stage and it would appear that while many agree with MPC member, Charlie Bean’s stifled optimism that the recent asset purchase plan was “well received,” and there’s no denying that credit markets have improved, the outcome is lacking in bottom-line growth. Until such time as it does, investors will reward the less fiscally burdened euro with the benefit of the doubt above the pound. The potential for a sterling devaluation rises for as long as the stigma of the asset purchase program fails to underscore growth. Currently a recovery is looking at best, subdued and at worst, a distant light at the end of the tunnel.

Australia’s dollar declined to 82.85 U.S. cents while the Canadian dollar slipped to 91.22 cents this morning as the better U.S. data argued for dollar strength. But as we alluded to above, the currency current was driven by news carried by China’s Xinhua News agency. It said that the government is studying ways to constrain domestic industries where over-production exists. Recently the state placed a moratorium on new steel projects for two to three years. A crop of new steel mills had cropped up and were competing aggressively to buy iron ore pellets from abroad, which forced up raw material costs. The answer was for the state to negotiate with suppliers and prevent a bubble within the industry, which was cranking out steel with few signs of growth in external demand.

Later in the day China’s State Council posted notice to its website that it would increase “guidance” of steel, cement, glass and power equipment industries in an effort to rein in growth of companies powered by record loan expansion throughout 2009.

Again, investors don’t need to see this potential economic dynamo exhibit further signs of being shut off. Growth sensitive currencies are weaker and investors have once again stretched for the safety of the dollar. Against the euro, many currency analysts are left scratching their heads. How can the euro fail to take the reins back from the dollar during a period in which Europe has achieved enviable (albeit questionable) growth? We’ve argued coherently that the dollar’s rout might be a longer run certainty, but it certainly isn’t an argument that fits the current environment. We would not be surprised to see more investors throw in the towel on the euro in favor of a dollar that may yet push back below $1.40 before August is through.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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