IB FX View

Tide continues to rise against the dollar

Tuesday October 13, 2009

When Germany’s ZEWCenter for European and Economic Research today released its index of investor and analyst sentiment, the immediate reaction to its unexpected drop was to sell euros. However, that response lasted mere moments before investors drove the euro up to its strongest price against the dollar since the Lehman’s collapse last year. The move underscores something we already knew about the dollar. It’s falling apart at the seams at a time when economic recovery is becoming heavily entrenched in glowing stock market performances around the world. The euro reached $1.4876 earlier as it teases dollar bulls on its way towards the neat, round target of $1.50.


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In recent days the dollar demise has shifted gear and attracted plenty of media attention. This is a common occurrence when seismic trends begin shifting. The bigger problem for the dollar is what might be in store next with the dollar index breaking to 14 month lows. It’s at times such has this when the potential for bigger moves draw a large speculative crowd in hope of super-size moves.

With the euro/dollar exchange rate compelled by gaining momentum and the specter of $1.50 there are other clear cut targets to look at.

The Canadian dollar seems to have sprung to life in recent days. At 96.84 U.S. cents or $1.0327 no matter how you look at it the prospect of parity is clearly the big draw now. As commodity prices escalate and appear boosted by strengthening global demand the case for holding the Canadian looks ever-more appealing. A strengthening jobs market and increases in volume of Canada’s major oil exports beg the question about how long the Bank of Canada might be prepared to sit out a rise in interest rates, much like the Australians delivered last week.

The Brazilian real is the best performing currency of the year relative to the dollar and has appreciated by 34% so far to stand at around $1.74. Updated predictions for the economy show 2009 edging ahead by 0.1% while 2010 should deliver 4.8% GDP growth. Brazil’s benchmark interest is anticipated to head towards 10.25% by the end of next year. Its resourceful economy has helped deliver currency stability throughout the crisis as the emerging economy shrugs off the impact of financial excesses epicentered many miles away.

The British pound continued to slip against the euro currency today and stands at 93.61 pence. The British Chambers of Commerce predicted today that the Bank of England would elect to expand its asset purchase program in order to nurture a weak economic recovery. Governor King earlier in the summer argued that the Monetary Policy Committee should take the immediate step of such fiscal expansion but was voted down.

The November meeting is a perfect time given its coincidence with the quarterly inflation report when the Bank’s economic team revises its growth and price outlook. While the pound currently looks insipid against the euro, it’s relatively stable against an otherwise beleaguered U.S. dollar at $1.5815 although one has to ask what impact the actual delivery of the asset extension might have on the pound. One could argue that only if its impact failed – a low probability event – would the pound fall victim to punishment via a concentration on the widening fiscal deficit.

The Japanese yen strengthened against both dollar and euro today to stand at ¥89.63 to the dollar and ¥132.80 per euro.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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