Risk-on currencies quickly reverse

It’s starting to look like the earlier bout of risk-taking that helped lift most of the major currencies to fresh weekly highs against the dollar is proving to be a false breakout. The dollar surged back from the brink despite a rather tame consumer price report issued earlier. The action almost leaves the impression that traders are increasingly worried over prospects for deflation, even though the numbers were not materially less than forecast.

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U.S. Dollar – The dollar index has recovered an earlier half-percent loss to stand higher on the session at 81.28 following a tame consumer price reading. August prices rose primarily on account of higher gasoline prices, which lifted the index by 0.3% while, excluding food and energy components, prices remained unchanged on the month. Prices on that basis are 0.95 higher than a year ago. The dollar’s surge went unnoticed versus the Japanese yen which twitched marginally higher, while it slipped sharply against the other bastion of safety, the Swiss franc.

Euro – An earlier rise for the euro ran into significant resistance post consumer prices. The euro had made further significant headway rebounding against the dollar and at the day’s best it notched up its highest point in more than a month at $1.3159. An earlier report showed very few inflationary pressures facing Germany’s manufacturers. Producer prices were unchanged through August causing the annual pace of change to head a notch lower to 3.2% on a year ago. The single currency slipped sharply falling to $1.3050 while it also reversed healthy gains against the Japanese currency from ¥113.00 to ¥111.95.

Japanese yen – The yen finds itself hemmed into a rather narrow range versus the dollar in the aftermath of midweek intervention by the Bank of Japan. Ahead of the bout of intervention, many onlookers predicted that such unilateral action would be futile and had anticipated that the market would rise up to counteract it. The force and scale of the yen sales seems to have alarmed most investors and rather than rallying against the BOJ, it’s the central bank that seems to have the upper hand. The yen continues to weaken and from the speculators’ perspective, any trading above ¥85.93 where the dollar’s rally petered out on Thursday may indeed incite further yen sales as speculators are forced to rethink the plot. Elsewhere the yen’s fortunes are mixed. As noted above in U.S. trading it has rebounded against the euro, but remains lower against the Aussie dollar at ¥80.67.

British pound – The pound was the biggest winner in early trading this morning and zoomed to $1.5727 against the dollar. There was no news to drive the sharp movement but the pound has undergone something of a revival throughout much of this week snapping back from a miserable performance. Most admit that the outlook for the British economy is poor ahead of severe public sector spending cuts and this has caused the pound to fall on hard times more recently. The pound actually reversed some of its weekly loss against the euro, which today buys 83.50 pence.

Aussie dollar – The Aussie also developed wings of its own in early trading and flew to a two-year high at 94.68 U.S. cents. However, it soon retreated all the way back to the nearest big-figure as the greenback fought back. The earlier jump in the Aussie was purely on account of a more optimistic tone for risk appetite as Asian stocks jumped. The Aussie unit is now faced with a bit of a knife-edge of its own: Many investors buy the Aussie on rising yield hopes as the central bank lifts monetary policy higher. However, that phase seems increasingly to be ending as investors pare bets that policy will continue to tighten. Typically when this happens, and despite its automatic yield advantage over lower yielders less advanced in the economic cycle, investors start to bet against the unit.

Canadian dollar – The Canadian dollar performed in almost identical fashion as dealers pushed it to 97.67 U.S. cents only to watch it crater to 97.00 cents as the greenback rose broadly.

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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