IB FX Brief: Dollar in a death spiral
In the spring as the euro lurched lower from day to day no one could see what possible break in the clouds might bring even a day’s relief from the storms building over the Eurozone. It seems that only four short months later it’s the turn of the dollar to face a death spiral of its own. The U.S. is on the hook for more stimuli. The onset of further stimulus purchases is viewed cautiously as a means to boosting activity even temporarily to encourage permanent economic traction. But the associated cost to the Fed of a further bulge in its balance sheet is perceived to be a devaluation of the dollar. And so more weak activity creates a greater assurance that stimulus is on top. Such a rising assurance is currently reinforcing itself as a nasty downwards spiral for the dollar even though other nations may face a similar although smaller resumption of bond purchases.
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U.S. Dollar – The latest piece of bad news for the U.S. economy came in the shape of a Conference Board reading of consumer sentiment. The gauge fell flat on its face and hit a seven-month low and while pessimism may have been quelled across equity prices as it inherently assures further Fed expansion, it was taken as bad news for the dollar. The dollar index reached its lowest since January 28 and is now down by 10% versus the euro in the quarter ending tomorrow. The index today trades at 78.81.
Euro – The rise in the euro continues and as it does we hear more and more voices challenging its appreciation. And with the ongoing woes, who’s to blame them? Spreads between core European government bonds and those of nations perceived to be both geographically and metaphorically “on the edge” of the Eurozone continue to rise. Investors are growing further cautious over the rising costs associated with bailing out failing banks and weak governments. At the end of the last quarter Moody’s Investor Services put the credit rating of Spain on watch as it reviewed the unfolding scenario in front of the nation. It promised to finalize its review within three months and that has investors edgy over the potential for an imminent downgrade for Spanish sovereign debt ahead of the weekend. And the final cost to the Irish government of propping up Anglo Irish bank is also due to be published this week with one ratings agency also suggesting that the cost could also is far higher than prevailing thinking and could amount to 20% of GDP. Yet the euro continues to rise and this morning shot to $1.3643. While the euro continues higher the economic data also appears to be brightening. For the whole of the Eurozone the September business climate indicator improved even after last month’s data was also revised higher. Economic confidence rose in September, while an index of industrial confidence became less negative and services confidence also ticked higher.
British pound – The pound faced an easy victory against the ailing dollar and remained close to its six-week high today and is reached $1.5874 earlier. Data was not so strong with a four-month low in mortgage approvals coinciding with a dip in the pound against the euro, which now buys 86.05 pence. The British economy is due to slow down from its healthy second quarter pace and faces significant fiscal headwinds. Like the U.S. economy, Britain is growing to be an increasingly likely recipient of a further bout of asset purchases by the Bank of England. Today MPC member Adam Posen threw down the gauntlet and dared the MPC to fully debate the need for additional stimulus spending. The original £200 billion plan was exhausted in March and Mr. Posen speaking in Hull today warned that the economy was in danger of slumping into a groove of permanently low activity should it continue to operate at severely low capacity. He argued in favor, subject to further debate amongst the MPC, for a resumption of asset purchases.
Japanese yen – The yen hit its highest at ¥83.50 since the mid-month round of intervention as sentiment towards the dollar weakened overnight. The bank of Japan’s Tankan report of big business actually improved more so than was expected to reach a reading of 8.0 in September – an improvement of seven points on last month and beating the forecast reading of 7.0. Business confidence is improving but the lackluster pace of improvement is blamed on the external environment, which comes full circle back to haunt the yen, which wins the battle for best safe haven currency. In mid-morning New York trading the yen fell sharply off this two week low in the kind of move that looks like intervention. The yen eased to ¥83.93 in a real hurry but we’ll have to see whether the move is followed through.
Aussie dollar – Another day and another day closer to the all-time high for the Aussie at 98.50 U.S. cents. The risk-on mode was reinforced today by an improvement in the Chinese PMI manufacturing reading from HSBC. The index once again showed building expansion and the reading of 52.9 is a five-month high in the series that earlier in the summer dipped into contraction territory. The Aussie rose to 97.29 cents.
Canadian dollar – Another record for the price of gold today and the broader depreciation of the greenback spurred a half-cent gain for the loonie to 97.30 U.S. cents today. The question facing investors is whether the Canadian dollar will divorce itself from the fortunes of the greenback given its close trading relationship. At present the death-spiral for the dollar is leading to gains across the board including some for the Canadian unit.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
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