Forex report: U.S. growth boosts dollar

A sharper than forecast rise in the pace of fourth quarter gross domestic product in the United States has helped lift early sentiment across equities. It’s also boosting the value of the dollar, which continues to outflank its peers and is fast becoming the logical currency of choice now that growth appears to be accelerating. Earlier, investors were giving little away in early New York trading. Equity futures are now pointing significantly higher although it remains to be seen if they can rebuff Thursday’s swoon. Treasury notes, which have hardly rallied during the dramatic stock market selloff are pointing lower in response to a decent dose of consumer spending and business investment within today’s report.

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U.S. dollar – The reappointment to a second term for Fed chairman Ben Bernanke did nothing yesterday to assuage investor fears. In that regard the risks were asymmetric in that had dissenters booed him off stage it might have opened a rather nervous chasm. His succession has instead left a series of fissures behind and one wonders whether a harsher economic climate might cause further erosion. And with investors likely to pore over the fine print of today’s GDP report, it’s remains to be seen how investors will wrap their arms around the strongest report in six years, when they couldn’t find the conviction to rally on the announcement of decent corporate earnings. One again the aftermath currently feels as though the risks are asymmetric.

The greenback is putting the yen, sterling and the Canadian dollar under early morning pressure, while the euro looks remarkably stable albeit back once again below $1.40. Meanwhile the Swiss franc is the only unit to stand up to the dollar but this is due to its relative safe haven status when surrounded by the euro, whose members are struggling with credible fiscal deficit reduction plans.

Japanese yen –The yen eased versus the dollar standing currently at ¥90.33 despite a 2.1% slide in the Nikkei. The stock market was more than likely responding to the dire global performance on Thursday and the yen’s weakness is possibly explained better by a decline in the rate of Japanese unemployment to 5.1%. The rate declined one-tenth of a point while economists had forecast a gain of one-tenth of a point. In addition data for December showed a fifth straight increase of 2.1% year-over-year in household spending largely fuelled, however, by measures put in place by government stimulus programs. The strong nature of Asian trade at the end of the year helped boost industrial output to a 2.2% gain, while there was nothing to save the ongoing slide in consumer prices, which fell by 1.3% year-over-year. The yen also weakened versus the euro to ¥126.16 while against the pound it fell to ¥145.50.

Euro – The euro is steady at $1.3963 after the Financial Times reported that according to high-level officials, the government of Greece would, as a last resort, receive emergency support from other Eurozone governments and from the European Commission. From the trading perspective it’s hard to know what to do with such information. First, it could be flat out wrong. It could be subject to rigorous denial from any Eurozone central banker that has not yet had his fill of horse trading. Third, it possibly only serves to confirm the lingering suspicion in many traders’ minds that the Greek situation wouldn’t be allowed to explode any further than the existing ripples created through widening bond spreads and euro weakness.

British pound – The pound lost some of its recent luster after what turns out to be the rehash of a view from the credit rating agency of Standard and Poor’s. It underlined its assertion that British banks were no longer as rock solid as they used to be and ratings on some institutions are comparable these days to banks in Portugal. After the U.S. GDP report the pound has slipped to $1.6084.

Aussie dollar – The U.S. growth report is actually a positive factor for both Australian and Canadian dollars since it points to greater conviction in the global recovery process and ought to lead to greater conviction towards risk-taking trades, or should at the very least show up in strengthening fundamental demand for commodities. The Aussie unit is trading at 89.45, marginally higher on the day, although the Aussie has been trending lower all week.

Canadian dollar –The Canadian dollar is steady at 93.90 U.S. cents after data showed a 0.4% increase in its monthly GDP for November. Crude oil is also on the rise bolstered by today’s U.S. report and a bout of unexpectedly severe weather in the U.S. north east bringing colder temperatures than two weeks ago buffered by strong and chilly winds. Gold prices, also a boon to the Canadian dollar, are also on the rise and conflict with a strengthening greenback.

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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