Forex report: Dollar on a rampage

Traders used the twin excuses of lingering concerns over the public finances of Greece and a sour investor confidence reading to beat down the euro on Tuesday to challenge its weakest point so far in 2010 ahead of the return from a long U.S weekend. Further detracting from risk appetite ahead of the onset of earnings season to full swing are ongoing fears that Chinese monetary tightening will negatively impact global growth, and the eventual bankruptcy filing of Japan Airlines. And while these events played into the hands of the dollar this morning, the one bright spot appears to be the British pound where a sweetened deal from Kraft for Cadbury’s is putting currency flows under the spotlight. As we conclude our daily report, the U.S. dollar is trampling on competing currencies sending the dollar index 0.6% higher to begin the week.

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Euro – The stresses and strains of the Eurozone are very much for real at the moment, and if you ask your local finance minister he’ll probably point his finger at Athens. EU commissioner for economic and monetary affairs, Joaquin Almunia said that while the plan drawn up by the government of Greece was adequate, it was comprised of what her called “ambitious” spending cuts.

Elsewhere a ZEW business confidence index was expected to slip in January, but in reality it fell by more than was expected. The expectations component of the series fell from a reading of 50.4 to 47.2 and served to compound a deteriorating picture for the euro. It fell to as low as $1.4289 in early Tuesday trade, just above the current year-to-date low at $1.4264.

Euro currency losses were deeper against the pound where sterling reached its highest since September at one point rising to 87.31 pence. Against the Japanese yen the euro slipped to ¥129.87 – its weakest point in a month.

Japanese yen –The eventual filing for bankruptcy by Japan Airlines gives the passenger-line the chance to restructure under the auspices of a government agency. It may also present a more appealing proposition post-restructuring to Delta Airlines, which immediately posted a press release after the filing giving the appearance it maybe interested in the new-look entity. It’s important to recognize in this event that Tuesday’s yen rally is not really a step up in risk aversion perhaps as much as it is the demand for yen as the company repatriates any assets presently domiciled overseas along with the unwind of any derivative contracts used in everyday operations. These dollar derivatives are also likely to find their way back onshore. The yen rose to its highest in a month to ¥90.32 before all round dollar strength pushed it back to ¥91.00.

U.S. dollar – Just ahead of U.S. trading at 7:45am ET, the dollar is springing into life notably against the Swiss franc, the British pound and the Japanese yen. It’s also starting to unwind several days worth of moves into riskier units typically known as commodity currencies.

Aussie dollar – The Aussie dollar is suffering somewhat in terms of the gentle creep higher in Chinese monetary policy. Another regular weekly auction by the People’s Bank of China resulted in higher 12-month bill prices at today’s auction. Possibly for want of a better excuse, investors continue to feel a little undermined by the gradual tightening process that has the potential to slow Australian exports. While any detrimental impact is likely to be marginal, in an otherwise rudderless market, the story won’t go away and is currently detracting from investor appetite for the Australian dollar. THe Aussie today buys 91.85 U.S. cents.

Canadian dollar – Today is a Bank of Canada meet, yet as already promised sometime ago in 2009, the central bank has already advised that it won’t be messing with monetary policy until at least the middle of 2010. A recent rise in the Canadian dollar towards parity with the greenback is something that central bank watchers will be listening acutely for to get a handle on just how sensitive policy makers are to an appreciation of local currency. Typically they have stated that a stronger local dollar has the potential to more than offset recovery and they have even left strong hints, backed by the finance minister, that they might even intervene to weaken the unit if economic conditions warrant it. After reaching 97.85 U.S. cents late last week, dealers have sold the Canadian dollar down to exactly 97 cents to start the week.

British pound –It’s a brave man who writes that the December CPI data is today boosting the forecasts for higher interest rates in light of a 2.9% jump for December data released earlier today. There is no way the central bank will shift policy anytime soon given today’s reading especially in light of the previous forecasts contained within the Bank of England’s quarterly inflation forecasts. While the reading is above the official 2% target it won’t change sentiment one bit. The pound also shot-up in earlier trading after Kraft’s bid for British chocolatier Cadbury’s was lifted. The huge premium likely means Cadbury’s board will recommend the takeover to its shareholders. Investors today bought the pound for hopes that they might benefit from merger flows in the event Kraft needs now to do some dollar conversion. However, this grain of a view didn’t germinate into anything meaningful as the dollar flexed its muscles sending sterling down from a five-week high at $1.6458 to $1.6328.

Andrew Wilkinson is a senior market analyst for Interactive Brokers. 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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