Forex report: Dollar rebound continues

IB FX View: Dollar rallies to greet FOMC meeting

The dollar is at its highest level in a couple of months this morning and slowly it seems that the euro is undergoing the same fate that the greenback faced when it stared into the November employment report on the back foot. Investors have largely written off monetary tightening across the Eurozone, taking the collective wisdom of several ECB officials to heart. While at the same time the ongoing demise of the present day Greek empire, well at least these days in terms of its debt ratings, and the potential it signals for fellow European satellite nations is cooling investor appetite for the single currency. The question is whether in quieter market conditions investors have caused the pendulum to swing too far the other way. The euro as a result now has close to a two-week and six-cent range.

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U.S. dollar –The Federal Reserve policy board begins its two-day meet today and the dollar is significantly stronger overnight. And while there are no bets being made along the lines that it will deliver any change in the language in Wednesday’s policy statement, it does feel as though the day has passed when money could be made by betting on an unchanged outcome. It seems that the risk for the dollar is presently to the upside. The pendulum may well have swung too far in favor of the dollar predicated on very little evidence of change. When one recalls the fervor that euro-bulls got themselves into over the subtleties of whether the ECB’s digression over a fixed or variable rate auction actually meant a monetary tightening or not, one wonders whether dollar bulls are not suffering from hair-trigger syndrome coincident with the FOMC meeting.

Euro –The euro eased to $1.4534 and its lowest value against the dollar since early October after a ZEW European Economic Research index showed investor and analyst confidence eased for December to 50.1 from 51.1 in the prior month. The sentiment index attempts to capture economic activity six months ahead of time and so the downtick is notable.

However, its dip was widely expected according to earlier predictions and it has to be pointed out that the survey of analyst and investor confidence comes hot on the heels of seven out of nine positive monthly stock market performances. The huge upwards march for global stock markets as investors discount recovery does provoke the question of “what next?”

Looking back one year ago at the same confidence series when there was no sign of respite for stock market behavior, the ZEW sentiment index read negative 57. At that time the euro was still in decline and was yet to record its weakest point of the recession against the dollar and was trading in the mid-$1.30’s, which hardly inhibits domestic manufacturing ambitions. At $1.50 and above, survey respondents possibly care more about the prospects for exports than they do about those for the stock market. It’s hardly a surprise given the run of economic good fortune that the confidence measure has run out of steam. In turn this news is another reason not to hold the euro in the prevailing climate.

On the positive front, the German IFO today revised higher its 2010 prediction for German growth to 1.7%. It will also unveil its latest business confidence measure later in the week. The euro rose to ¥130.30 against the yen, but slipped against the pound sterling to buy 89.60 pence.

Aussie dollar – Minutes from the December RBA meeting at which the Reserve Bank notched up its third consecutive quarter point interest rate increases were released today. The members digressed over whether or not to actually increases at their meeting and the wording recorded in the minutes reveals that by doing so it would afford greater flexibility ahead when setting policy. The local dollar lost a penny overnight and currently stands at 90.59 U.S. cents as investors reduced the odds of a February rate rise.

Japanese yen –The yen lost out to the firmer dollar and one dollar currently buys ¥89.52. Asian stocks saw modest losses but certainly nothing that instilled the notion that markets were set to react to a new round of risk aversion fears.

British pound – The pound made good gains against the euro and yen after data showed a pick-up in domestic inflationary pressures in November. Against the dollar the pound slipped and currently buys $1.6228. The November consumer price index rose a larger than expected 0.3% on the month and 1.9% year-over-year with investors taking the perspective that the data might force hands at the Bank of England sooner rather than later when it comes to remedial monetary policy action.

Canadian dollar – The Canadian dollar is standing up reasonably well to nine back-to-back losses for crude oil and a near 10% slide in the price of gold in response to U.S. dollar strength. The local dollar isn’t necessarily finding itself hitched to the fortunes of commodity prices. A strong 1.3% increase in the reading of leading indicators, at twice the forecast pace, did little to inspire the Canadian dollar’s fortunes earlier. New motor vehicle sales also increased at a fast 3.5% pace in October, passing the 3% forecast. The potentially positive news became a sideshow in the light of strong U.S. producer prices released at the same time. Currently the Canadian dollar buys 94.10 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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