IB FX View

U.S. government gets a $45 billion mail-in rebate from BoA                 

Thursday December 3, 2009

The risk appetite fountain is fully on this morning as investors the world send stocks cascading higher and the dollar down along with government bonds. Overnight gains in Asian stocks where investors pushed the Nikkei up 3.8% in response to a weaker yen were cemented by the announcement from Bank of America that it would use the proceeds of $19 billion in sold stock and top it up with cash lying around on the sidelines to repay the government’s $45 billion in TARP assistance money. That fact not only helps put the state of Dubai’s total loan book, said to be $89 billion into perspective but also boosts sentiment towards financial markets.


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U.S. dollar –The weaker tone for the dollar was set in motion midweek after the Fed’s Beige book show of regional conditions indicated a modest revival in economic conditions at eight of the 12 regional districts spurred by consumer spending. The remaining four regions saw largely unchanged conditions.

Comments from Richmond Fed chief, Jeff Lacker laid the point bare that the U.S. has already hit rock bottom and predicts a “reasonable” pace of 2010 growth. The broad conclusion that investors reached from all of these events was that risk appetite is strengthening. That is currently a negative factor for the dollar. It fell against the euro to $1.5120 in early New York trading but rose against the Japanese yen as the resumption of risk was largely spurred by relief for exporters. Investors continue to unwind fear-based positions in the yen as a result of the decline in the fear surrounding Dubai loan provisions.

Ahead in today’s trading is the American ISM services reported and is likely to remain expansive for the third month in a row. The report is due out at 10am ET.  Before that the reading for initial jobless claims may show a rebound from last week’s 466,000 claims to 480,000. A reading beneath half-a-million would still remain consistent with projections for November job losses of 125,000 in Friday’s official report.

Euro – The euro is a bulled up and raring to go ahead of the ECB’s press conference at which it will discuss changes to its economic view for the Eurozone and announce the terms of the final liquidity add due on December 15. There seems to have been a subtle shift away from outright euro favoritism based on zero interest rate policy at the Fed to an expectation that the ECB is moving towards raising rates. In my opinion, this euro preference has always been tied to the pace of risk aversion rather than a timetable for changes in monetary policy. I’m not sure the ECB is at the stage of wanting to even discuss tighter official policy, but we do know for certain that its emergency liquidity adding days are past. For now the euro deserves its gains above $1.50 but I’m starting to doubt investors’ foundations for the current push. That means the euro maybe susceptible to a pullback if central bankers try to adjust the market’s mindset back towards an extended period of low rates.

British pound – The pace of service sector expansion stood still in November according to today’s CIPS service sector purchasing managers index. With a reading just below October’s two-year high, the pound was initially jolted to life against the dollar at $1.6722, but has since recorded an intraday low at $1.6615. In terms of risk preference, investors chose the euro and so ended a two-day gain for the pound against its European counterpart. The euro buys 90.92 pennies as investors take today’s positive date in their stride mindful of the prospects for a weaker fiscal position likely to accompany next week’s pre-budget delivery by the Chancellor of the Exchequer. 2010 is also set to deliver political change and could very well easily leave investors abandoning the pound as the ongoing fiscal and recovery processes are dealt with.

Aussie dollar – Taking its cue from surging Asian stock markets, the Aussie is higher by 0.5% today and stands at 92.95 U.S. cents. Earlier the Aussie breached 93 cents for the first time in a week. Once again, and we’re not yet tired of reporting it, the price of gold reached a new record high as the U.S. dollar index slumped by 0.34%. Gold is Australia’s third most valuable export. In addition to positive commodity price news domestic data proved that consumption is very much alive as October sales rebounded in-line with a 0.3% expectation. Whether this instills further fears in the minds of RBA members remains to be seen. Suffice it to say, the Australian currency still remains supported by market expectations of another 1% rise in interest rates over and above the prevailing  3.75%.

Canadian dollar – A data-free day for Canada ahead of Friday’s employment data has the Canadian dollar marginally ahead against the U.S. dollar and today the loonie buys 95.25 U.S. cents.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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