Forex report: Pound stands out

Little change is evident at the start of New York foreign exchange trading midweek, but risk aversion earlier created a six month low for the euro, which also felt the weight of stories carried by the Wall Street Journal and the Financial Times both suggesting that the government of Greece may attempt to sell €25 billion of its bonds to Chinese investors. The Greek finance minister denied a report that his government had mandated investment banker Goldman Sachs to sell its bonds to China. Perhaps the word ‘mandated’ was what upset the minister. Despite a five-week low closing low for Japan’s benchmark Nikkei Dow stock index, there appears to be a shortage of fresh impetus to further inspire risk aversion on the agenda. While that could quickly change, investors have to act swiftly to lighten the load on their favored short candidates with the dollar showing signs of edging back after recent gains.

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Euro – The euro reached an intraday low earlier at $1.4022 only to reverse direction to where it currently stands at $1.4082. The ongoing health of peripheral nation status is helping grind the euro lower. It’s not simply a question of the dollar winning over the euro as risk aversion rise these days. The potential devastation to the entire Eurozone in the absence of speedy and independent solutions to local fiscal problems is causing the investor angst at present. The euro has rebounded to unchanged on the session against the Japanese yen, which earlier was making further risk aversion gains. The euro slumped to ¥125.25 for a none-month low before catching its breath and climbing all the way back to ¥126.20. Against a stronger pound the euro has fallen to 86.75 pence, although sterling has been unable to breach euro support at last week’s low of 86.51 per euro. European banking stocks continue to drag the markets lower.

British pound –Market reports show that corporations are buyers of sterling one day after the pound slumped due to a lackluster reading of GDP, which saw the British economy only crawl out of a recession that most other economies leapt from. Sterling has fallen recently but continues to exhibit few if any signs of outright collapse, and yet the rebounds are quite remarkable. Fears of a decline for sterling are largely based upon a well known script of fiscal, political and economic challenges for as far as the eye can see. However, once again today it’s notable how swift the currency positive news can lift the spirits of the pound, which has jumped to $1.6233.

Traders were fast to play down a CBI distributive sales survey showing a net downturn in retail sales, probably due to an already weak December reading. But the pound seems to have bucked up in response to the words delivered by MPC member Andrew Sentance. Recently he’s been a little hawkish regarding policy and today warned that the Bank of England would have to face head-on in February the challenges of rising service and import costs. He noted it will be hard to restrain inflation in the face of continued gains in the prices of those series.

Investors appear to be gathering around the pound in the hope that the sound of his tone might carry sufficient weight to bring an official end to the quantitative easing policy under which the central bank has bought £200 billion in government and corporate paper. Investors seem to believe that the sooner Britain can shake off the QE blues, the better. And while an end to this policy might not signal an imminent increase in monetary policy it is very likely a pre-requisite to eventual changes to interest rate costs.

U.S. dollar – The dollar index measuring the worth of the dollar against a basket of currencies of common trading partners is slightly lower this morning after overnight gains. The FOMC statement is issued at 2:15pm ET this afternoon and we’ll be looking for any news on an extension to MBS purchases after the existing plans expire in March. Stability in the housing market is key in helping maintain consumer confidence and therefore spending. This evening the President addresses the American nation in his State of the Union speech.

Japanese yen –The yen continued earlier to benefit from risk aversion and its strength against the dollar lifted it to a five-week peak at ¥89.13, it also managed to do the inverse to the domestic stock market where exporters’ shares suffered. The yen has since eased to unchanged on the session at ¥89.62. It also strengthened earlier against the Aussie dollar which is often seen as a major barometer of risk appetite. However, the Aussie rebounded and as noted above, it appears that we’ll need fresh blood to see risk aversion stakes improve.

Aussie dollar – Against the U.S. dollar the Aussie is ever so marginally down on the session at 89.87 U.S. cents, but can take heart from the fact that the overnight low held above Monday night’s low. In other words the Aussie is finding decent ascending support. Having tested the upside in early New York trading the Aussie is back to flat on the day. A government report today showed a slightly larger than forecast gain for consumer prices for December. Prices rose 0.5% over the previous month and added 2.1% over the prior year. The RBA meets on Tuesday to deliver its response to data since it last lifted interest rates in December. The IMF yesterday advised that Australia will grow at 2.5% in 2009 and 3% in 2011.

Canadian dollar – There is little to say about the Canadian dollar this morning, which possibly explains a near-unchanged stance at 94.05 U.S. cents. Although crude oil prices are slightly firmer ahead of supply data, copper, gold and silver prices are lower and that’s dulling appetite for the loonie. Currently Tuesday’s low at 93.51 has set a base under its price. Today’s low is 93.63 cents. There is no data on the economic calendar through Friday.

Andrew Wilkinson is a Senior Market Analyst at 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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