Forex report: Formidable headwinds remain for $

IB FX View: Sour tone leaves both dollar and yen bid

Dealers are feasting on refried yen today – a reheated form of a rather popular menu item served up to satisfy risk averse investors when the going got tough lately. The dish is proving far more popular than that other latest fad, known as the gourmet greenback. A subtle recommendation to savor the taste of each was issued by international currency critic, Moody’s Investor Services and from established culinary masters Dudley and Bernanke.

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U.S. dollar–Far from using Friday’s still-glowing employment report to impress the success of coordinated fiscal and monetary policy measures, Fed chairman Bernanke chose to wear a hair-shirt on Monday in addressing a crowd at the Economic Club in Washington. Instead of giving himself a pat on the back, Bernanke chose to stay with familiar language in discussing the “formidable headwinds” the economy faces ahead. That perspective is seemingly shares by the views of ratings agency Moody’s, which overnight dished up more warnings over the risks associated with government deficits. It said that the U.S. and the U.K.’s sovereign ratings were “testing the Aaa boundaries.”

New York Fed chairman, William Dudley said that the rate of unemployment was still much too high and that continued weakness along with low inflation would mean that it would be appropriate to keep the fed funds target rate exceptionally low for an extended period.

The overall negative tone is washing over investors towards year end in a manner that is making them rethink the plausible benefits of staying hawkish on the value of the dollar. The rejuvenation of the employment situation last week has changed the view that the Fed will never raise rates again, while the downplaying of this event is putting risk aversion back under the spotlight as investors reassess this year’s investment finale.

Japanese yen–Signs of diminishing popularity for Prime Minister Hatoyama abound, although they probably didn’t inspire the delivery of a fresh stimulus plan out of the Japanese government today. The $81 billion equivalent yen package is designed to counter a period of deteriorating employment and still sluggish demand completely uninspired by the backdrop of a deflationary environment. The government said that about half of the spending will be spent on aiding Japan’s regions. The yen rose against the dollar to stand at ¥88.58 bolstered by the news of the package today, on a day where risk aversion is growing. Against the euro the yen appreciated also to ¥130.52 as U.S. stock index futures reversed course to reflect a possibly ugly Wall Street opening.

Euro–continues to look weak and is challenging Monday’s weakest point at $1.4756 against the dollar. An unexpected contraction in the reading of German industrial production, which sank 1.8% for October as opposed to a scheduled 1% gain, has soured investor appetite for the euro today.

British pound – Chancellor Darling delivered a speech last night and challenged the opposition party to outline cuts it would make if elected. Mr. Darling believes that the current pace of public borrowing can be maintained and dealt with – not necessarily an easy task but one that he claims is manageable. Tomorrow he is due to outline how a re-elected Labor party government would halve the current level of borrowing over the next four years. He told his audience last night that he’d rather face criticism for withdrawing the prevailing stimulus measures too late rather than too soon.

The pound is again weaker against the dollar at $1.6289 following lower than expected readings for industrial production and manufacturing output for October – both of which proved to be unchanged on the previous month. Mortgage lender Halifax reported a 1.6% monthly rise for house prices around the nation. Meanwhile the British Retail Consortium revealed that the lowest rise in spending on food items in a year helped slow the overall pace of national retail sales growth for November. The 1.8% pace of sales improvement compares to 3.8% for October.

Aussie dollar – A rise in the National Australia Bank’s business sentiment index, which added three ticks to a reading of 19 was the highest in seven and-a-half years. Nevertheless the Aussie is down to 90.04 U.S. cents today as the growing risk aversion theme gathers pace following comments from Moody’s.

Canadian dollar –The Bank of Canada is highly likely to leave its target range at 0.25% when it announces the outcome of its December meeting first thing this morning. Analysts will be looking for signs that it will stand by its earlier pledge to maintain low or possibly unchanged interest rates until the end of the second quarter of 2010. While the most recent growth data has disappointed, other anecdotal data shows a return to healthy construction activity where a low level of interest rates is creating something of a boom. Record low mortgage rates are enticing investors to buy homes. Monday’s building permits data reflected a return to pre-crisis volumes of activity. At the time of its October statement, the Bank of Canada reiterated that a rising exchange rate was likely to fully offset some of the favorable economic developments that had fallen into place since July. With a more recent rebound in activity it will be of interest to hear what they have to say about the exchange rate this time around. The Canadian dollar is a little weaker ahead of the 9am announcement and buys 94.84 U.S. cents.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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