IB FX View

Surge to six-year high for U.S. growth boosts dollar

Friday January 29, 2010

A sharper than forecast rise in the pace of fourth quarter gross domestic product in the United States has helped lift early sentiment across equities. It’s also boosting the value of the dollar, which continues to outflank its peers and is fast becoming the logical currency of choice now that growth appears to be accelerating. Earlier, investors were giving little away in early New York trading. Equity futures are now pointing significantly higher although it remains to be seen if they can rebuff Thursday’s swoon. Treasury notes, which have hardly rallied during the dramatic stock market selloff, are pointing lower in response to a decent dose of consumer spending and business investment within today’s report.


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U.S. dollar – The reappointment to a second term for Fed chairman Ben Bernanke did nothing yesterday to assuage investor fears. In that regard, the risks were asymmetric in that had dissenters booed him off stage it might have opened a rather nervous chasm. His succession has instead left a series of fissures behind and one wonders whether a harsher economic climate might cause further erosion. And with investors likely to pore over the fine print of today’s GDP report, it remains to be seen how investors will wrap their arms around the strongest report in six years, when they couldn’t find the conviction to rally on the announcement of decent corporate earnings. Once again the aftermath currently feels as though the risks are asymmetric.

The greenback is putting the yen, sterling and the Canadian dollar under early morning pressure, while the euro looks remarkably stable albeit back once again below $1.40. Meanwhile the Swiss franc is the only unit to stand up to the dollar but this is due to its relative safe haven status when surrounded by the euro, whose members are struggling with credible fiscal deficit reduction plans.

Japanese yen –The yen eased versus the dollar standing currently at ¥90.33 despite a 2.1% slide in the Nikkei. The stock market was more than likely responding to the dire global performance on Thursday and the yen’s weakness is possibly explained better by a decline in the rate of Japanese unemployment to 5.1%. The rate declined one-tenth of a point while economists had forecast a gain of one-tenth of a point. In addition, data for December showed a fifth straight increase of 2.1% year-over-year in household spending largely fuelled, however, by measures put in place by government stimulus programs. The strong nature of Asian trade at the end of the year helped boost industrial output to a 2.2% gain, while there was nothing to save the ongoing slide in consumer prices, which fell by 1.3% year-over-year. The yen also weakened versus the euro to ¥126.16 while against the pound it fell to ¥145.50.

Euro – The euro is steady at $1.3963 after the Financial Times reported that according to high-level officials, the government of Greece would, as a last resort, receive emergency support from other Eurozone governments and from the European Commission. From the trading perspective it’s hard to know what to do with such information. First, it could be flat out wrong. It could be subject to rigorous denial from any Eurozone central banker that has not yet had his fill of horse trading. Third, it possibly only serves to confirm the lingering suspicion in many traders’ minds that the Greek situation wouldn’t be allowed to explode any further than the existing ripples created through widening bond spreads and euro weakness.  

British pound – The pound lost some of its recent luster after what turns out to be the rehash of a view from the credit rating agency of Standard and Poor’s. It underlined its assertion that British banks were no longer as rock solid as they used to be and ratings on some institutions are comparable these days to banks in Portugal. After the U.S. GDP report the pound has slipped to $1.6084.

Aussie dollar – The U.S. growth report is actually a positive factor for both Australian and Canadian dollars because it points to greater conviction in the global recovery process and ought to lead to greater conviction towards risk-taking trades, or should at the very least show up in strengthening fundamental demand for commodities. The Aussie unit is trading at 89.45, marginally higher on the day, although the Aussie has been trending lower all week.

Canadian dollar –The Canadian dollar is steady at 93.90 U.S. cents after data showed a 0.4% increase in its monthly GDP for November. Crude oil is also on the rise bolstered by today’s U.S. report and a bout of unexpectedly severe weather in the U.S. north east bringing colder temperatures than two weeks ago buffered by strong and chilly winds. Gold prices, also a boon to the Canadian dollar, are also on the rise and conflict with a strengthening greenback.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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