Yen Strength masks better tone to risk appetite

A couple of U.S. data points have forced several bears to rethink the prospects for the world’s largest economy. Strength in consumer sentiment and manufacturing output have also lowered demand for dollars for fear of a second recessionary wave. It remains curious as to why the pressure remains on the Japanese yen even as the dollar gives back further gains. Clearly such pent-up demand infers that we’re not out of danger just yet. In the meantime commodity-sensitive currencies appear to be building a head of steam as the clouds appear to be lifting – for now at least.

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Euro – Today’s monthly ECB meeting is likely to pass without change to policy. The central bank is likely to extend its emergency lending measures into 2011 to overcome a period of uncertainty. Already the ECB is committed to lending the region’s banks through October and a logical decision to expand lending facilities for a further three months would carry borrowers into the new year and help alleviate year-end funding concerns. The euro rose but has so far failed to match a midweek peak against the dollar at $1.2855 and stands at $1.2826 ahead of U.S. initial claims data. The euro remains near a nine-year low at ¥107.85.

British pound – Following isolated manufacturing activity weakness announced in Wednesday’s data, the PMI construction reading of 52.1 confirmed the slowdown in recovery. The reading was meant to come in at 53.2 after a July data point of 54.1. The pound is having a hard time keeping up with the risk recovery tone and remains lower at $1.5400 this morning. The picture was also muddied by a Nationwide Building Society index confirming a second monthly slowing for U.K. home prices. The 0.9% decline for August builds on a July dip of 0.5% and eats into annualized gains leaving a weaker reading of 3.9%. Fears are mounting that a return to weakness in the housing sector will dampen consumption and confidence in the month ahead coincidental with government spending cuts. The pound also continued its ailing trajectory versus the euro, which rose to buy 83.30 pence today.

Aussie dollar – A weakening in the value of the monthly trade surplus has been cited as the reason for today’s dip in the Aussie to 90.91 U.S. cents. However, it was only over the last two months that the record surplus blew out leading to increasing optimism on the unit. Today’s data showed a July trade surplus of A$1.9 billion and short of the forecast $3.1 billion. Common sense says that in an environment of worries over the health of the global economy, it makes no sense to expect outliers to arrive month-after-month. Exports declined to the lowest level since February at A$25.4 billion. The rebound in the Aussie from its reaction lows to the data appears to promise follow through buying at anytime soon.

Japanese yen – The yen could only manage a gain overnight to ¥84.00 before turning lower with little fresh by way of global fear to keep up the challenge beyond a seven-year high for the Japanese currency. Still, the yen is not ideally positioned for many more positive shocks should global health continues its improvement. It continued to strengthen against the Aussie dollar and British pound despite no material signs of ill-health today.

U.S. Dollar – After a big decline on Wednesday the dollar index retains a weaker tack and stands at 82.38 ahead of official U.S. trading. The ongoing moribund state of the labor market is likely to be confirmed by a stubbornly high reading of initial claims data this morning. However, the revival of consumer confidence and the unexpected positive turn for manufacturing helps undermine the fear bid that has driven the dollar higher.

Canadian dollar – Choppy trading in the Canadian dollar continues. I noted lately that the better risk tone was courtesy of factors driving Asian markets and to a large extent was ignoring Canada’s dollar. It was suffering more at the hands of the bad news for the U.S. economy than the greenback itself. And so the better performance for manufacturing and an unexpected uptick in consumer confidence have opened up the floodgates for gains in the Canadian dollar, which today rose to 95.34 U.S. cents. The Canadian had weakened to 93.66 cents on Tuesday.

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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