The talk on the street driving currency movements appears to be whose quantitative easing will be smallest. Larger volumes of bond purchases are thought to be a sign of weakness and as such are currently hanging over the dollar. The euro on the other hand seems to be holding up nicely as ECB officials continue to tell us that they will at least provide ample liquidity to the financial sector. An early bout of risk aversion took a grip after Asian equity prices led European prices down by the nose only for an ECB official to warn that its emergency support might be withdrawn. Meanwhile, comments attributed to a former adviser to the Chinese central bank allegedly warned that a depreciation of the dollar maybe unavoidable. The pair of comments quickly rounded up what had earlier been a good start for the dollar.
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U.S. Dollar – The dollar was bid earlier in the session after Asian stocks slumped dragging down European indices right from the start. S&P futures followed suit and the natural response was a jump in the value of the dollar. Its index made a positive close on Monday and immediately built on its gains before turning south on the session after comments from an ECB official gave the appearance that all was well in Europe.
Euro – There is little to report data-wise other than German consumer confidence, which rose to 4.9 in October after the September data was revised higher. Consumer prices across the largest Eurozone country were unchanged on the previous month while rising 1% year over year. In France, consumer spending data was confusing with the monthly data disappointing while the annual data beat forecasts. ECB member Juergen Stark welcomed Monday’s money supply data noted that a “turning point” may have been reached. The earlier bout of dollar strength forced weak euro longs out of the game as the single currency was driven to an early morning low at $1.3381. However, the warning that the ECB might consider taking away the emergency measures was seen as a sign of strength. The remarks possibly need qualifying. First, we know that the ECB will continue to provide liquidity. It has previously stated that it would prefer to get back to more normal conditions. The knee-jerk response of euro strength simply puts the Eurozone ahead of the U.S. economy in the growth cycle serving to remind dealers that the U.S. has more easing ahead, while the Eurozone possibly doesn’t need it. Further, the earlier tone towards the euro was negative as dealers put the unit in the cross hairs fearing an ascendance of further worries over the banking system, not to mention the weight of debt constraining sovereign nations. With little else to go on in the present climate, today’s volatility in the euro reminds us just how fickle sentiment remains. Earlier euro losses were pinned on suspicions that a ratings downgrade for Spain might be imminent. The euro surged to an intraday high at $1.3495 before easing to $1.3460 where it remains in marginally positive territory.
Japanese yen – The longer the yen trades sideways versus the dollar the longer it will appear to be a fixed exchange rate. The possibility that the central bank will again be forced to enter the market to sell the yen is keeping a lid on any dollar upside for now. The dollar only managed to rally as high as ¥84.27 earlier in the session and has since declined to ¥84.05 – its lowest since mid-September intervention. A Nikkei business news article suggested further monetary policy easing at the Bank of Japan at its meeting next week. The Bank could inject longer-term funds into the market or could buy more Japanese bonds in the market if it believes that growth is under threat. However, some still say that the central bank will want to keep its powder dry in the event that the situation worsens. The yen also improved against the Aussie, euro and pound this morning.
British pound – A CBI distributive trades survey showed Britons spent more in the month than was expected. The September reading of reported sales was expected to come off a 35 reading for August and slide to 21. In the event sales jumped sending the index to 49 and is taken as a sign that consumers remain confident in the face of a slow to recover labor market and a weakening housing market. The pound shot up from an intraday low at $1.5780 to $1.5895 before declining to an unchanged reading of $1.5826.
Aussie dollar – The Aussie was pole vaulted higher as European risk appetite returned around lunchtime. It reached 95.59 U.S. cents at its worst before surging to as high as 96.39 cents. Onlookers believe that this month’s surging Aussie has perhaps been too speedy and to expect some respite in its pace of gains against the dollar. Certainly a rally to parity would be a huge hurdle to overcome at this point. The Aussie has since pared gains to stand at 96.05 cents.
Canadian dollar – The Canadian dollar has come off an earlier 97.05 U.S. cents peak after being forced down by growing risk aversion. A weak session for equities and a slide in the price of crude oil didn’t do the loonie any favors and today the unit appears to have been put into the same category as the greenback as its largest hurdle right now remains the perceived threats to growth within the world’s largest economy. The loonie is currently trading at 96.65 cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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