Following last week’s show of health in the shape of reasonable U.S. job creation, investors find themselves at the start of the same cycle witnessed back in the second quarter. Growth around the world appeared to be picking up at the time, while the punishment ailing the euro began to run out of steam. The risk-on rally reflected the disappearance of clouds on the horizon. As we fast forward to today, a similar picture is emerging. The pressure is once again off the U.S. economy as the modest pace of improvement continues. Decoupling is once again emerging as a theme now that a Chinese slowdown has passed the turning point. Once again the emergence of clouds across Europe surrounding a worrisome sovereign debt crisis is detracting from overall risk appetite as the euro and British pound stand out as heavyweights again today.
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Canadian dollar – Following the Bank of Canada’s shift to a 1% rate of interest at its monthly meeting midweek, the Canadian dollar has now risen to a three-week high against the dollar reaching 96.68 U.S. cents. With the August employment report scheduled for release on Friday, money traders face a heightened sense of awareness about the pace of domestic recovery. And while the policy statement weighed the uncertainties surrounding the risks to the U.S. economy in regard to further moves, the emphasis in today’s interest rate trading is on the still “exceptionally accommodative” policy stance after the Bank noted that its recent moves represented a “modest tightening.” Apparently the barn door remains wide open to further policy adjustments, which means a stronger payroll reading than the forecast of 30,000 would certainly boost the loonie again on Friday.
Aussie dollar – The Aussie is simply flying today following a hotter than expected employment report for August. Odds of a further increase in interest rates were enflamed by the bold policy action by the Bank of Canada and reinforced by a 30,900 gain in employment last month. Within the report some 53,100 full-time positions were created, providing further evidence that business confidence is flying high. The currency rose to its highest since May and today trades at 92.74 U.S. cents. Courtesy of a positive revision to the July report Australian employers have created 7,400 more jobs than expected during the past two months bringing the total to 55,900 reducing the unemployment rate to 5.1%.
Japanese yen – The yen continues to lurk towards its recent 15-year highs against the dollar and today trades at ¥83.73. Finance Minister Noda stepped up his campaign of attentive deficit towards the yen by promising more of the same bold currency action against the rising currency. But first, he says he is studying the likely effectiveness of currency intervention. The ever-sliding yield available on U.S. assets continues to weigh against the appeal of the greenback relative to the yen.
Euro – The tailwinds of the sovereign debt crisis that sank the euro earlier in the year continue to gently whistle across the region. Earlier in the week the Association of German Banks estimated that its top 10 bankers would need to raise €105 billion in fresh capital. Today ECB member Juergen Stark addressing German lawmakers repeated that warnings and noted that state-owned Landesbanks and German savings banks were the greatest threat to sovereign risks. The FT Deutschland newspaper notes that the latter were not subject to the rigors of the recent European bank stress tests. The euro fell earlier to $1.2665 before attracting buyers who drove the unit higher to where it currently trades at $1.2756.
British pound – As expected, the Bank of England made no changes to policy at today’s MPC meeting. The currency’s path retains a volatile one: In midweek trade the pound rose against the dollar to a peak at $1.5533 while today it earlier slipped to as low as $1.5376. As equity prices rally in the U.S., both the pound and the euro are trying to emulate the performance of the commodity dollars, which has afforded a recovery for the pound to $1.5450.
U.S. Dollar – The Fed’s Beige Book yesterday reported ongoing recovery, although at a decelerating pace between mid-July and the end of August. While the risk rally for commodity dollars has seen the dollar lose ground, there is little sign of any respite for the dollar against the other major risk barometers. The dollar remains pinned down by both the Swiss franc and the Japanese yen today sending the dollar index lower to 82.40.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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