Risk currencies back on the chopping block

The end of August is here and that may well mean that the battle lines are redrawn tomorrow. But, for now it means that the Japanese yen remains higher against all 16 of its major trading partners and the dollar’s rebound continues as investors continue to fret over the health of the U.S. economy. The fact that the dollar index is marginally lower masks a bigger move in which riskier currencies are falling hard and fast against the greenback, making for a possible explosive finale to this month’s trading.

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Japanese yen – Yen strength versus the dollar is again apparent on Tuesday morning. Risk aversion was gently spoon fed to investors as the ugly process of a wind down at a long-established New Zealand finance house came to a rather final solution. Failure to find a buyer for South Canterbury Finance led to its filing for bankruptcy today hindering the domestic currency and weighing on risk sentiment. The yen’s daily advance against the dollar towards ¥84.00 still keeps it shy of last week’s ¥83.59 peak even after a former Bank of Japan policymaker stepped on his successors’ feet.

Nobuyuki Nakahara who served on the central bank’s board until 2002 warned that the Japanese economy would be unable to gain any traction until exporters were able to get back on their feet again. The only way to deter inflows directed towards the yen is to eliminate the Bank’s 0.1% official benchmark loan rate in order to reduce the spread between dollar and yen. He said that “lowering the policy rate to zero is a must to slow the yen’s gains.” Mr. Nakahara also advised the government to authorize the purchase of bonds in order to create funds for much needed public works spending programs. In New York trading the dollar buys ¥84.33 while the euro buys ¥106.92.

U.S. Dollar – The yen’s strength is masking an otherwise positive day for the dollar index, which is lower by just three basis points at 83.13 today. The dollar continues to find support from an erosion of confidence in the stock market as early sellers continue yesterday’s weakness in the S&P 500 index. Throughout August, economists have become increasingly disenchanted with the future momentum in various contributors to growth. Business investment, housing and consumer spending data have each given cause for concern leading to lower GDP projections for the remainder of the year.

Euro – The euro actually gained some ground against the dollar overnight after a weak close at the start of the week. The euro this morning buys $1.2690 against the dollar and has edged up versus the pound to 82.57 pence. Earlier data released within the Eurozone showed a dip for July to a 1.6% annualized pace of increase for consumer prices while the rate of unemployment across the euro area remained static at 10%.

British pound – The pound is decidedly lower without significant reason on Tuesday. Data showed a larger than expected rise in the count for mortgage approvals for July. Earlier data was also revised higher. On Monday property company Hometrack Ltd. announced the largest monthly decline in home prices in 16 months. Despite that, a GfK NOP survey of consumer confidence released today posted its first monthly gain in six months. The pound has declined sharply to $1.5369 from $1.5460 at Monday’s close. It appears that rising risk aversion is testing investors’ mettle on the currency’s prospects.

Aussie dollar – The Aussie was equally shunned despite a decent swath of data pointing to a robust economic performance. In early New York trading it has fallen to 88.60 U.S. cents, which compares to a peak on Friday at 90.30 cents. The sharp falloff comes despite a healthy outturn for July retail sales, which easily beat expectations with a 0.7% monthly gain. At the same time, July data was revised to twice its initial pace. Building approvals also beat forecasts significantly. Data for July showed a 2.3% month-on-month pace of gain after a 3.3% dip in June. Ahead of the release, analysts forecast a decline of 0.7%.

Canadian dollar – The curious moves conclude with a sharp weakening in the Canadian unit, which is back on the ropes and trading almost at its weakest point achieved during the past seven days. The vindication for slippage to the intraday low at 93.78 comes from weaker than forecast growth data released earlier. GDP for June was 0.2% as expected although the May data point was halved to a 0.1% gain. However, the second quarter figure fell short of a 2.5% forecast coming in at 2.0%. The first quarter pace was also slashed from an earlier estimate of 6.1% to 5.8% and clearly has soured the tone towards the Canadian dollar once again presumably given the closer linkage to the dollar economy.

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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