Dollar surges as equity index futures decline

Forex patterns in early New York trading lean towards a firmer dollar with risk aversion concerns at the fore after pre-market equity index futures stumbled. However, the dollar’s rally masks a more positive risk-on tone witnessed in Asia after analysts mull the potential for China to go easier on its deliberate slowdown policy now that the economy has cooled. Yen strength is also another key element today and it’s hard to know which party is likely to be most frozen. The Bank of Japan has very little room for maneuver while investors fret that the popular resort might become yen intervention.

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U.S. Dollar – The dollar is bid this morning. Curious in today’s trading is that the yen is weaker and at odds with a typical date with risk aversion at present. The dollar index is 0.4% stronger at 82.83.

Speculation has mounted in Asia that following the slowdown in the pace of growth in China to 10.3%, the domestic authorities have succeeded in their aim leaving them challenged by further slowdown. Arguably that is the greater threat over and above a threat from inflation, which unexpectedly fell according to latest data. Throw into the mix the fact that the recent decoupling of the yuan to its dollar peg will also bear down on inflation and you can see why the risk to growth might outweigh that of rising consumer prices. According to China Business News today the cities of Beijing and Shanghai can expect to experience home price declines of 20% for the second half of this year. The PBOC’s policies of restricting loans to calm speculative forces in the property markets have largely yielded success. Curbs to bank lending may now appear too severe, leading to upward revisions to the amounts banks can lend to customers for the remainder of the year. As authorities recently mentioned the trick ahead will be to balance the domestic situation with a difficult international one.

Asian stocks rebounded hard with the Shanghai index up 2.2% for a second day of gains on optimism that the environment is about to change. However, you wouldn’t know that looking at the sad state of U.S. equities in early trading.

Euro – The euro is a casualty of today’s dollar strength and has quickly given up ground to as low as $1.2856 after ending Monday at $1.2945. It would be easy to blame nervousness ahead of the Friday release of the European banking stress tests, which are not due until after Europe closes for business. However, there is a lack of any conviction as to the specific content of the results and it doesn’t feel like there is a groundswell of conviction that there will be a fudge. Don’t forget also that the U.S. banking stress tests yielded a very favorable result for asset markets in its wake.

British pound – The pound also felt the backlash of dollar demand and has slumped to $1.5156 from $1.5232 on Monday. A CBI business optimism reading was altogether unfavorable for the pound indicating weakening demand. The July index of 10 after a 24 reading for June compares to expectations of an index value of 22. New mortgage approvals were also below expectations fuelling more bad news for the property market while a flat monthly reading for the M4 component of the money supply leaves the annual pace of expansion at 3%. The pound did manage a gain versus the euro to 84.84 pence, while it eased to ¥131.90 against the yen.

Aussie dollar – The Aussie was stronger on optimism over China during the Asian session. Hopes that China will take its foot off the brake pedal boosted optimism that Australian exports would continue to expand. Further, the June RBA meeting concluded that the central bank should await the outcome of the European stress tests along with consumer price inflation data due next week before determining whether it should continue its monetary tightening process. Although the inflation war is almost won in Australia the central bank will likely push rates higher in the knowledge that policy can be quickly reversed if they’re proven wrong. The Aussie leapt to 88.14 U.S. cents from 86.93 on Monday before easing to 87.36 cents as the greenback powered ahead.

Japanese yen – The dollar rose to ¥87.18 overnight but is only holding on to a slim gain at ¥86.85. The recent yen appreciation flourished under conditions of rising economic uncertainty with yen repatriation and safe haven flows lifting the unit to its highest against the dollar since Dec. 1. Two factors were cited in an overnight weakening of the yen. Bargain hunting importers were blamed for selling their currency today in exchange for cheaper dollars. Rising discussion surrounding a Bank of Japan intervention was also a vogue factor. The central bank could in theory buy more corporate and government bonds in the market in order to ease its policy stance by encouraging lenders. By selling the yen in the currency market it could send a strong message that it is cautious over exporters’ prospects with the exchange rate so high. Intervention has a less certain outcome.

Canadian dollar – According to all analysts the Bank of Canada will hoist the monetary flag for a second time since the financial crisis two years ago at 9am ET this morning. That would lift the policy setting to 0.75% and may boost the appeal over time of the Canadian dollar. Having fallen last week on global growth concerns, the local dollar rose ahead of the meeting to buy 95.19 U.S. cents from 95.75 cents on Monday. Half of the nation’s export revenues are sourced from its natural resources.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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