IB FX View

World Bank revision sours risk appeal

Monday June 22, 2009

“Yum. Those green shoots were delicious,” said one panda to the other. “Are there any more?”

“I’m afraid not,” replied the other.


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Last week we noted towards the end of the week how the price behavior of the dollar versus the euro seemed out of kilter with the stories du jour, which should have harmed the dollar and boosted the relative appeal of the euro. We noted then the sharp decline in the value of the euro relative to the yen over the week. The dollar index has come in with an almighty bid this morning with two major backers. The World Bank’s latest growth revisions carried a sour tone, while the escalating tension caused by the outcome of the Iranian election is cause for dealers to don their tin helmets.

Aversion to risk always happens when tensions escalate in the Middle East. This time the world gets to see for itself at first hand the ill-feeling the Iranian elections have caused. The fact that mobile telephones can quickly capture and transmit live events that are immediately uploaded to widely-watched news sites delivers a real-time air of importance. People need no longer wait to be spoon-fed daily news and can see for themselves what’s happening within the borders of a nation whose voters are disgruntled by what they claim is a rigged election. And when Hugo Chavez stands up to applaud the outcome and support President Ahmadinejad, the cake is iced.

It’s at times like this that investors turn to dollars as a safe haven. Typically they also turn to crude oil for fears of supply disruption, but today heavier factors are sending commodity prices lower across the board.

The World Bank sounded distinctly downbeat as it revised down prospects for world growth this year and calming its forecast for growth in 2010. Within the report, the Bank noted that rising unemployment in the world’s developed nations was likely to filter through into far-worse living conditions for a rising wave of jobless victims across developing nations.

The World Bank raised its prediction of contraction from a reading in March of 1.7% to 2.9%. For next year the bank predicts grow around the world will be 2% and so lower than the 2% forecast of March. The reading from the World Bank crystallizes many economists’ recent views that the green shoots of recovery really were far less apparent than many had chosen to see. The bank asks that leading global government take a fresh stamp on the accelerator despite signs of recovery later in 2009 to ensure that the impact on developing nations is far less than it fears.

The bank also predicted a sharper U.S. economic contraction this year of 3% compared to its earlier 2.4% forecast. Global trade is expected to contract 9.7% in 2009, far more than its earlier 6% prediction. The dollar rallied to around $1.3825 against the euro earlier as investors realized there may be worse to come ahead.

President Jean Claude Trichet of the European Central Bank sounded distinctly downbeat at a Madrid conference earlier today when he also said that central banks must be on the watch for signs of a “sudden emergence of unexpected financial turbulence.” Elsewhere Austria’s central bank chief and ECB member, Ewald Nowotny stated that he felt the ECB has a realistic growth outlook for the remainder of 2009 and that therefore the bank has an appropriate handle on its repo rate at 1%.

In the U.K. a leading estate agent’s survey of house prices fell in June as credit tightened and lenders asked for larger initial deposits. As we have indicated recently, it’s hard to understand how home prices had recently increased in value. The pound fell today to $1.6395 and to 84.60 pence against the euro.

Commodity dollars fell sharply in light of the World Bank’s predictions. Copper, crude oil and aluminum prices declined over fears of lower Chinese demand. The Aussie is now back at 79.25 U.S. cents while the Canadian dollar buys 86.77 cents.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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