Commodity dollars and equities fan risk flames

The dollar is trading at a two-month low against a basket of its most actively traded partner currencies. An overnight upbeat assessment of the Australian economy by the Reserve Bank of Australia saw risk appetite creep slowly back on to the table as it left monetary policy unchanged. Meanwhile, U.S. markets reopen after a long holiday weekend with pre-market futures underpinning a healthier attitude towards risk. Commodity dollars appear supported by evidence that physical demand remains intact after a whopping Australian trade surplus.

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U.S. Dollar – Several recent bearish equity market closes last week felt the gravitational pull of an economic rebound slipping back to earth. Possibly too much has been made of this event as investors firmly wiped risk off the plate. Comments this morning were also reported by Japan’s Nikkei News stating that in an interview Dallas Fed President Richard Fisher predicted growth for the second half of 2010 would be towards the lower part of a 2-3% range. The article says that nervousness surrounding financial markets would continue to hamper growth, while consumer spending had been harmed by the unwelcome return to decline for the housing market. All in all, the dollar’s fate has recently suffered as the perception creeps higher that the U.S. economy is no longer a hotbed of recovery.

Aussie dollar – We can thank the Australians for a firmer tone to risk on Tuesday. Investors there had been braced for a tough economic pep talk from the RBA. While it did indicate a more worrisome take on the outlook for global growth the central bank also dropped the part of its statement that kept the embers glowing over further interest rate increases. It dropped the “appropriate for now” part of its statement indicating that it really isn’t thinking much about lifting rates for the foreseeable future. However, the statement underscored the health of the Asian economy and indicated that businesses were strengthening spending, as were consumers. Other trade data released on Tuesday also confirmed a healthy level of activity for coal and gold. Not only did May data show a healthy trade surplus of three-times an expected A$500 million rate, but April data was revised sharply higher by a factor of nine to yield an earlier surplus in excess of A$1 billion. The Aussie jumped back onto the risk radar today and broke through 85 U.S. cents in early morning trade.

Japanese yen – Such a notably more bullish tone harmed the Japanese yen today sending it down by more than one yen against the Aussie to ¥74.70 while it slipped half as much against the euro to ¥110.54. Against the dollar the yen eased only marginally to ¥87.83.

Euro – The euro has maintained most of what the U.S. employment report afforded it last week. However, it did dip on Monday in quiet holiday trading. The euro once again breached $1.2600 on Tuesday and currently stands at $1.2589.

Canadian dollar –The Canadian central bank meets in two weeks and will be able to better gauge the interrupted economic recovery after this Friday’s employment report. The labor data is expected to show a rise in the employment count by around 20,000 workers bringing the rate of unemployment to 8.1%. Thanks to its close ties to its southern neighbor, the Canadian dollar has felt more of the downdraft from the slowing U.S. economy although physical demand for commodities remains healthy. The local dollar reached 94.50 U.S. cents in early trade and fails to command the same respect as the Aussie at this point in time.

British pound – The British pound continues to trade like a risk-currency on Tuesday. After its initial rebound above $1.50 in the middle of the week, the pound has now built a base above that line in the sand remaining supported above it since last Thursday. It is a little weaker against the euro at 82.95 pence.

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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