Dollar optimism checked by rising equities

Forex markets started out on the same footing as they left off last week with dealers shying away from riskier alternatives. The strength apparent across the safe havens of both dollar and yen in recent days has gently removed a veil of fear behind which lurk the twin demons of a global economic slowdown and the seeds of tension within the Eurozone. However, as the morning progresses fear appears to be on the wane as stock market futures are buoyed by equity price gains in Europe.

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Euro – The euro broke support early on Friday as selling pressure accelerated through $1.2750. Since then the single currency has remained hemmed in a narrow range and quickly found support at $1.2664. The battle between buyers and sellers has centered on a struggle north and south of exactly $1.2700. Early on Monday sellers’ attempts to create a further wave of weakness ran aground at $1.2682 after the release of Eurozone PMI data. The August data showed a minor slowdown across the services and manufacturing sectors leading to a decline in the PMI composite reading from 56.7 to 56.1. The index was two-tenths lower than forecast but continues to show a healthy pace of expansion, albeit at a slower pace. The euro subsequently rose to $1.2725 and currently trades just below unchanged on the day.

Japanese yen –The Japanese yen rose against 15 of its 16 major trading partners as dealers continue to anticipate signs of slower growth around the world. Later in the week Japanese export data is expected to reflect the dip in activity with year-over-year export data falling from a 27% pace of improvement to a 21% growth rate. The yen rose to its best against the dollar at ¥87.09 in early New York trading with buying pressure mounting after a cabinet official detailed the finer points of a telephone conversation earlier in the day between Bank of Japan Governor Shirakawa and Prime Minister Kan. According to his comments the two exchanged views on the health of the economy and the state of current exchange rates. However, the discussion did not include reference to currency intervention. The yen continued its ascent versus the euro and is closing in on its 2010 peak achieved in June when it reached ¥107.32. Today the euro weakened to ¥108.18. Tokyo data released earlier revealed a marginally smaller decline in sales at supermarkets during July where consumers spent 1.2% less than in June.

U.S. Dollar – The dollar remains buoyed by last week’s data indicating a contraction in manufacturing activity. Investors continue to rely on weaker data points to spur the dollar as they look forward to housing market data later in the week. Existing home sales for July are expected to have shrunk 13% to an annual pace of 4.68 million units. New home sales are expected to remain flat, while durable goods orders are expected to have risen for the first time in three months when data is released this week. The dollar index is marginally lower to start the week at 82.98 having fallen to 80.08 almost three weeks ago.

Aussie dollar – The perils of political uncertainty took a grip of the Aussie dollar following a weekend vote in which neither political candidate could wrestle a victory over the other. Julia Gillard’s ploy of ousting the Prime Minister five weeks ago and calling a snap election appears to have failed in light of voters’ appeal to the overtures of opposition leader Tony Abbott. Both won 72 of the 150 seat battle meaning that each must now negotiate for power among the several independents in order to win a ruling majority. The outcome took its toll on the local dollar, which slumped to 88.58 U.S. cents as the results indicated political gridlock. However, investors appeared to shrug off the outcome and bought the Aussie all the way back up to 89.75 cents as risk aversion abated.

Canadian dollar – As investors await Tuesday’s retail sales reading for the Canadian economy the local dollar is picking itself up from its weakest against the U.S. dollar in exactly one month. The domestic currency suffered the fallout of weakening U.S. data last week and reached its lowest point at 95.07 U.S. cents on Friday. To begin a new week, the loonie has risen to 95.52 cents.

British pound – A private quarterly report by accountant Grant Thornton showed a decline in business confidence for the third quarter driving the pound lower to $1.5527. A Markit Economics diffusion index of household finances for July barely budged as it came in at 37.9 indicating continuing deterioration in household finances. A reading of 50 indicates neutrality while readings above indicate improving finances. Investors are growing increasingly pessimistic on the pound now that Prime Minister Cameron’s budget measures are starting to take effect. The pound did rise against the euro, which today buys 81.71 pence.

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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