Ahead of Tuesday’s FOMC statement, dealers bought government debt and the dollar in hopes of an afternoon delivery of further quantitative easing from the central bank aimed at further rejuvenating the sagging economy. Only one side of the trade worked well for traders. The Fed said inflation was too low to be consistent with its objectives and stoked fears over possible deflation. The market was swift to conclude that further quantitative easing indeed was likely, which drove yields down as the market had guessed ahead of time. But the response by the dollar was remarkable in the sense that the investors’ rationale for more stimulus created disdain from dollar longs that now see the potential for even narrower yield spreads between the dollar and yen for an even longer period.
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Japanese yen – The Ministry of Finance, in observing yesterday’s response to Fed actions, must have felt as though they were looking inwardly rather than outside at the sticky plight of U.S. policymakers. The dollar’s descent leaves it at its lowest price against the yen since intervention took place exactly one week ago. The yen rose to ¥84.52 this morning and undoubtedly leaving traders braced for further unilateral Japanese intervention. In an interview with the Financial Times today Prime Minister Kan warned that Japan must build economic and monetary policies that weaken the yen.
U.S. Dollar – Although the diagnosis from the FOMC appears negative, risk aversion is hardly mounting as a result. Despite the mounting problem facing the U.S., investors appear to be expecting sustainable upside to alternative global growth opportunities potentially leading to a nasty downwards spiral for the greenback. The slide in the dollar index took the dollar in to an altogether new dimension today as it broke the April and August lows declining to 79.75 for a 0.9% loss. Ahead of the FOMC on Tuesday, dealers had hoped for a further easing to be announced to aid an ailing economy with stubbornly high inflation. What they got was a more worrisome message from the Fed that deflation was lurking in the background and although that lays the groundwork for an intermeeting announcement ahead of the midterm elections, it’s hardly the message the market needed to hear.
British pound – The pound added around two cents from yesterday’s low at $1.5504 to peak earlier today at $1.5716. The retail industry body CBI said today that public sector spending cuts in the pipeline will likely drag on growth more so than it expected at the time of its most recent forecast in June. The trade body cut its prediction for 2011 growth for the British economy from 2.5% to 2.0%.
Euro – The euro remains the biggest victor on the heels of dollar weakness and today breached the early August high at $1.3333 to trade at $1.3396. It was almost six months to the day when the euro last traded above $1.3400. The euro also surged against the British pound to buy 85.41 pence. A Portuguese government offering of debt made for a successful triple-play of so-called peripheral governments auctions. Yesterday, Spain and Ireland were both able to find more than enough buyers to take up bond offerings.
Aussie dollar – The Aussie struck a further two-year high versus the dollar today following a Westpac leading index report that showed little impact of a six-string rise in interest rates on the economy. The leading index rose 0.4% in July and is strong enough to suggest that looking several quarters ahead the pace of growth won’t let up. The coincident index also showed that the economy continues to push the boundaries of acceptable growth and vilifies recent hawkish RBA comments suggesting that remedial monetary measures will be needed if the pace of growth fails to slacken. The Aussie rose to a high of 95.83 U.S. cents in Asian trading, but failed to penetrate that peak in European trading and has since recoiled to 95.56 cents.
Canadian dollar – The loonie made a strong run at 98.00 U.S. cents in early New York trading but has subsequently eased to 97.51 cents. The growth opportunities elsewhere around the world are supported by rising metal and energy commodity prices witnessed recently. Gold prices touched another all-time peak earlier this morning at $1,296.50 per ounce.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLcNote: 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.