Currencies respond to Chinese data and Basel III

Investors’ risk-taking appetite increased over the weekend on account of a conclusion to enhanced global banking regulations intended to prevent financial companies from burning down the house again, while robust Chinese data proved bearish predictions wrong again.

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Aussie dollar – The Aussie rose to 93.34 U.S. cents after Chinese data once again confirmed that the pendulum has past the bottom and is once again gaining upwards momentum. The Aussie last traded with such an optimistic beat at the end of April this year – the last time investors collectively felt all was well with the world. Today seems no different as they cast off veils of pessimism and embrace a pattern of strengthening data. Industrial production statistics released over the weekend delivered a more robust 13.9% year-on-year increase than the 13.0% analysts had penciled in. Data also showed that consumers in the world’s most populous nation continued to spend at a brisk pace as retail sales also improved by 18.4% year-over-year. The August M2 measure of the nation’s money supply also grew beyond that reached in July and at 19.2% was above forecast as new yuan loans rose to 545.2 billion ($80 billion). In response to the flurry of activity, the Peoples Bank of China allowed the yuan to rise against the dollar and the daily fixing rate of 6.7502 per dollar was the highest yet since the peg was abandoned five years ago.

Canadian dollar – The Canadian dollar also felt the benefit of rising risk appeal. Both gold and crude oil prices have recently resumed price gains that automatically lure more buyers to its currency. As the fundamental background of improving global demand reasserts itself, investors are rallying around the loonie, which is also feeling the tailwind of a further quarter point lift in yield as ordained last week by the Bank of Canada. Investors are also starting to poise the question of whether, if the economic recovery continues, there will be more monetary tightening on the horizon. Today the Canadian buys 96.90 U.S. cents.

Euro – The euro rose earlier in the session in response to the weekend announcement of the conclusion of Basel III. The accord among global banking regulators tightens capital requirements of banks although financial companies were given eight years to comply with the new rules. Common equity for banks must equal 4.5% of their assets weighted according to risk. The new rules also require a further 2.5% cushion to act as a buffer against potential future stress. Failure to comply would require banks to stop paying out dividends although stops short of requiring them to boost capital. The euro peaked this morning at $1.2833 before dipping its toes beneath $1.2700 again.

Japanese yen – Overnight the yen pared some more of its recent gains and reached ¥84.50. The improving risk tone, a jump in regional equity prices and the positive picture painted by Beijing data all helped. The recent widening of premiums available on U.S. yields also impeded the yen’s performance. Yet still the yen managed to rally back to below ¥84.00 even in the face of all of this information creating the image of a sumo wrestler sitting cross-armed on top of Uncle Sam’s greenback. Tuesday’s battle between Prime Minister Kan and contender Ozawa should leave the political status quo intact although a shift towards the challenger might incite yen weakness in light of his interventionist rhetoric.

British pound – The pound initially used the warmer waters for risk-taking as an opportunity to rally hard against the dollar reaching $1.5487. Yet for no apparent reason it was driven down sharply while other risk units maintained a positive reading on the session. The pound slumped all the way back to $1.5389 in short-order, acting like a drunken sailor struggling with terra firma. The euro also jumped a half penny against the unit to trade at 83.13 pence.

U.S. Dollar – The dollar index is 0.6% weaker at 82.24 to commence the week as risk appetite rebounds. Its biggest loss is against the euro, which has gained 1%, while the Aussie is 0.6% stronger.

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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