IB FX Brief: Forex quiet until Bernanke and Trichet light the fireworks
Plenty of saber-rattling out of Tokyo overnight keeps yen bulls dancing on red-hot stones and has kept the latest phase of its rally firmly in check overnight. Friday is starting out on a quiet front ahead of the delivery of fresh information from Jackson Hole where Mr. Bernanke and Mr. Trichet will offer their latest views on domestic activity. Currency markets remain subdued until they hear more from central bankers on Friday about how they currently perceive the health of their local economies.
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U.S. Dollar – There remains a risk that Bernanke’s view is less than clear, which could unseat recent equity market stability while the potential for a further expansion of the Fed’s balance sheet could also undermine the dollar. Mr. Trichet’s most recent views expressed three weeks ago couldn’t contrast the performances of the Eurozone and U.S. economies in much more different light. His lunchtime speech has the potential to cause some indigestion. The dollar index has continued to weaken during the past couple of session and has edged higher this morning to 82.92.
Japanese yen – The Nikkei rose by 1% in the Friday session as the yen remained pressured by the strongest words so far from Prime Minster Naoto Kan. He said that the government was prepared to take “bold” action against the currency’s strength. Quite what “bold” means is anyone’s guess, while the market realized that it’s an important step-up from earlier commentary. Some say that his words are more directed at an increasingly pressured Bank of Japan to act rather than aimed directly at speculators hell-bent on testing the mettle of the authorities. For his part, Mr. Kan also promises to outline the next wave of stimulus measures by the next Tuesday. Data out of Japan overnight showed a minor downtick in the rate of unemployment through July to 5.2%, while household spending rose by less than forecast at 1.1%. The Tokyo CPI fell by 1% and also less than forecast a basket of goods purchased across the nation also slipped by a similar amount in July at a 0.9% pace. The yen trades at ¥84.77 per dollar and down from ¥84.45 on Thursday.
Euro – The euro heads into the Jackson Hole speeches at $1.2715 having reached its lowest point of the week on Tuesday just below $1.2600. Interest in what ECB chief Trichet has to say centers on whether he’ll bow to most recent economic data that worries most investors about economic slowdown or whether he’ll point to the Eurozone’s summer recovery and outperformance. A return to thoughts on how to exit from quantitative stimulus might boost the euro especially if Mr. Bernanke fails to catch the falling knife of domestic economic performance. The euro also gained against the weaker yen to ¥107.72.
British pound – The pound didn’t flinch much to second quarter GDP data released earlier showing a 1.2% pace of expansion lifting the annualized pace of output growth to 1.6%. The pound has slipped a little this morning and trades at $1.5493. Second quarter trade data also showed signs of weakness with both import and export data coming in at around half the predicted pace of expansion. The euro made gains against the pound and rose to buy 82.03 pence.
Aussie dollar – The Aussie is putting in a brave performance versus the dollar but still remains constrained by overhead resistance. The August 17 high at 90.77 U.S. cents connects to Monday’s 89.83 high and is providing a tough climate for the Aussie at present. Investors appear happy to buy the unit versus the yen on a rebound basis but the presence of the overhead trendline is capping appetite at 88.80 cents this morning.
Canadian dollar – The impact of the yen on the Canadian currency is far less important and that remains apparent in the chart of the domestic dollar as it struggles to gain traction against the U.S. unit. Thursday’s rally to 95.01 U.S. cents has faded on Friday and the local dollar buys only 94.25 cents this morning.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
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.
