Dollar recovers but economic uncertainty continues

Following Friday’s rollercoaster ride for the dollar, the start of a fresh new week is noteworthy for its lack of action. The immediate reaction to the July jobs report was to sell the dollar on account of presumed further U.S. weakness. Stocks were blindly sold because investors feared consumption might dwindle, while bonds were bought sending yields screeching lower in the expectation that the FOMC must have little choice now but to follow-through on previous hints to resume purchases of mortgage backed securities. Bond prices are the only thing that has stuck after the report has been fully digested. The dollar stopped falling and equities are on the rise again today as investors are reminded that we are still in a prolonged period of low interest rates, while further stimulus – should it ever arrive – will be a boon to riskier bets around the world.

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U.S. Dollar – The dollar slid to two-month lows on Friday as temporary census workers were let go. The overall number of jobs lost was twice the street forecast and immediately delivered the impression that the economy continued to cool. Private hiring continued to remain in the black albeit at an anemic pace. The dollar cheapened to $1.3334 on Friday before it rebounded. This morning the dollar index is steady having put in a fresh low for the move on Friday. On Tuesday officials at the Federal Reserve will announce their assessment of the current state of the economy and may take the chance to announce further stimulus measures. However, they will probably be more inclined during this stage of a moderation in growth to talk tough and make further hints about how they could intervene further. There is a strong chance that FOMC officials are fretful over delivering a shot to the foot by announcing new measures now. To do so would capitulate along with other gloomy forecasters expecting the economy to fall off a cliff. The current lack of certainty for the economy and for policy will likely continue to weigh on the dollar until signs of consumer strength emerge.

Japanese yen –The yen strengthened on Friday to ¥85.02 as dealers traded in the dollar for a better form of risk aversion. But on reflection investors are switching sides and are buying dollars and selling yen. The reason is unclear. Two proposals are that the dollar’s recent slide can’t keep up its unrelenting pace, and that an imminent announcement from the Fed might help contain the dollar’s losses even if only short-lived. The yen has also reversed earlier gains against the Aussie dollar and British pound although it still remains higher against the euro if only by a small amount.

Euro – Despite a strong reading of German exports for the month of June and a prediction from the Banque de France that industrial output would lead an expansion likely to deliver third quarter growth of 0.3%, the euro was under the hammer today as the dollar fought back. The euro is around a whole penny lower against the dollar at $1.3239 after Friday’s stretch to a three-month high. German exports in June expanded by 3.8% beating an expected gain of just 1.5%. Today’s report showed exports in the summer were 29% higher than a year ago. Curiously sales to non-euro nations swelled by 37%.

Aussie dollar –The Aussie was drawn towards that elusive 92.00 cent level on Friday where it had broken down from in April as double-dip fears mounted. The subsequent decline saw the Aussie fall all the way back to 80.75 cents before a four-week recovery brings us back up to date. An earlier in the morning rally was encouraged by growing risk appetite for riskier assets only to fall by the wayside leaving the Aussie buying 91.87 cents.

British pound –The pound is also losing its earlier steam to the dollar and is now in the red at $1.5948 having kissed $1.6000 after Friday’s labor market data. Investors continue to flit from the bearish to bullish camps regarding the prospects for the pound seeing it as being hitched to the suddenly better prospects for the Eurozone economy.

Canadian dollar – The Canadian dollar suffered on two counts on Friday. Investors were primarily disgruntled by the domestic employment report, which showed an unexpected loss of 9,300 jobs lifting the overall rate of unemployment to 8%. Within the data there was a huge transfer of full-time to part-time jobs giving the impression that formerly optimistic employers were suddenly not so confident. And of course the market was hardly enthralled by the U.S. employment report given the fact that the United States is Canada’s biggest export market. The consequence is that a dip in the loonie hasn’t gone away with the Canadian unit sliding from 98.90 U.S. cents on Thursday to a present 97.20 cents.

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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