Forex report: Back to the core

Tuesday is starting off to be one of those days when everything suddenly changes before you even have time to put your feet under the table. Risk aversion is most definitely the order of the day as more and more people discuss the prospects for a dreaded double-dip recession. The catalyst is twofold and self-feeding incorporating Chinese economic data and U.S. bond yields.

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U.S. Dollar – A Conference Board leading economic indicator for China rose at the slowest pace in five months according to April data. Coupled with rising inflationary pressures, investors fear that the Peoples Bank of China will have little alternative but to now raise rates at a time when growth appears to be rolling over. Last week’s widely followed yuan appreciation was supposed to take care of rising inflationary pressures but investors are now running around like headless chickens in fear that monetary tightening aimed at inflation is less necessary to constrain growth. As a result, bond yields have tumbled again out of concern that recovery just hasn’t got the legs driving the two-year yield to a record low and the 10-year yield below 3% for the first time in almost 15 months. As a result investors are moving back to the core currencies of the dollar, Swiss franc and Japanese yen that have a proven track record of standing firm through crises.

Euro – While the dollar index is roughly 0.5% higher, this seems to be impacting the euro to a far lesser degree than when it was purely European prospects clinging to the ropes. The euro has weakened, although a crumb of comfort earlier fell off the table for investors in the form of a Eurozone economic confidence reading for June, which contradicted expectations of a decline and came in at 98.7. The euro fell to reach a low at $1.2176 earlier but has regained its feet and is back above $1.2200. The real victims today are the commodity dollars.

Aussie dollar – The risk-off tone in Tuesday’s trade has buried the Australian dollar, which has shed 1.8% to stand at 85.69 U.S. cents. Just 24 hours earlier the unit stood at 87.75 cents. The move comes wholly on account of the fear that China is slowing and that a currency appreciation is no cure for further increases in monetary policy. We’ll have to see what the PBOC has to say about that. Commodity prices as you might expect are under the gun with the price of gold and crude oil both down. Copper prices are back beneath $3.00 per pound and down by 2.7% today.

Canadian dollar – Sliding U.S. yields are responsible for much of the loss of trust investors had put into the Canadian dollar. A domestic growth spurt has a significant reliance on U.S. demand, while the Bank of Canada has been toying with further monetary policy measures to tame inflation accounted for by strong commodity demand for its mineral resources. A global slowdown might impact Canada hard, which accounts to a large degree for why the loonie has been hit hard today. The unit was trading at 96.75 U.S. cents on Monday before today’s selling pressure took it down to 95.10 cents.

Japanese yen –It’s the hard currencies that are strongest today and that includes the Japanese yen, which has risen in light of weaker economic data. Growth fears have encouraged investors to drop the red-hot iron of the Aussie unit where a plus-4% premium is there for the taking. Yield cushions lose their comfort when growth looks grim. Japan’s trade surplus and lack of reliance on international investors to fund the world’s largest budget deficit create an idyllic safe haven where investors love to visit when global stress overcomes greed. The rate of Japanese unemployment rose from 5% to 5.2% according to government data today, while industrial production fell by 0.1% in May rather than rising by the same amount. Household spending also fell 0.7% in May matching an April decline failing to live up to expectations of a 0.3% monthly gain. The yen rose to an eight-year high against the euro to stand at ¥108.40 while it also reached a seven-week peak per dollar and stands at ¥88.78.

British pound – Bolstered by the recent budget and spending cuts the pound remains supported above $1.50 against the dollar and is trading at $1.5074. Data today revealed static monetary growth as well as mortgage lending approvals according to Bank of England data. The pound also rose against the euro and reached below 81 pence for the first time since November 2008.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers

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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