Forex market pricing potential affect of QE2

The dollar is fighting back after a near one-month battle with currency majors as dealers start to think deeper about the size of the package the Fed is likely to deliver in November. The yen on the other hand is maintaining its position as currency du jour as safe haven flows prop up its value around the world. The numerous factors arguing in favor of the yen as a refuge in tough economic times make things harder for the Bank of Japan as it struggles to find enough fingers to plug the dike as currency strength trickles through to create tough times for exporters. Dealers remain wary about the chances of central bank intervention ahead of a weekend summit of finance leaders in South Korea.

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U.S. Dollar – The 55th Annual Economic Conference hosted by the Boston Federal Reserve over the weekend offered a platform for two more regional central bank speakers to offer their support for further monetary easing. Chicago Federal reserve President Charles Evans warned of the “liquidity trap” facing the domestic economy in which borrowers fail to respond during a period in which a wall of money is offered at ultra-low interest rates. Mr. Evans claims that the Fed’s dual mandate would significantly miss target by the end of 2012 if current forecasts calling for unemployment at 8% and an inflation rate of 1% hold true. Boston Fed President Eric Rosengren also warned that preventing deflation might be far less expensive than dealing with eradicating it, should it arrive. Last week Chairman Bernanke also stated that there appears to be a case for further monetary action. The dollar initially shuddered sending it to its weakest against an array of currencies since January. But as investors mull precisely what dollar value of easing might be announced, the market appears to be indicating that perhaps too much has been priced in. The dollar index today has rebounded to 77.41 compared to Friday’s desperate reading of 76.15.

Euro – The Bernanke speech at the start of Friday’s trading saw the euro surge to $1.4158. However, later in the day the dollar found its feet and has continued to sprint on Monday morning having eroded some of last week’s strength. The euro has weakened this morning to as low as $1.3831 according to Interactive Brokers data. Later in the week the ZEW investor confidence survey will be put to the test and is predicted to show a continued decline in investors’ optimism over the nearby climate for investing. The euro eased against the yen to stand at ¥113.00 in early New York trading.

British pound – The coalition British government will detail the final spending cuts in the Comprehensive Spending Review on Wednesday. Chancellor of the Exchequer George Osborne will detail the decisions taken at an emergency budget following the summer general election in which a broad 25% cut in most ministerial budgets was announced. The Chancellor aims to eliminate a current deficit of £156 billion after four years. The pound trades defensively to begin the week and reached $1.5838 before rebounding to $1.5900 in the early New York session. The pound dipped by one yen to stand at ¥129.27 this morning.

Japanese yen –Dealers see little prospect of nearby intervention from the Bank of Japan ahead of a G20 meeting of finance chiefs and central bankers at which the thorny issue of currency values will be discussed. Even as the dollar jumped on Monday, it was countered by ongoing flows in to the Japanese unit having the effect of maintaining the yen’s value against the greenback. Today the dollar buys ¥81.29. In domestic data, retail sales slipped somewhat around the country with a September report showing nationwide department store sales stood 5.2% lower than at the same time last year, while in Tokyo the decline was less dramatic. Store sales dipped 3.8%.

Aussie dollar – A fleeting spike through parity against the greenback on Friday lasted for less than five minutes and coincided with the release of text from Fed Chairman Bernanke. The dramatic move appears to have been caused more by stop-loss buying rather than the words of the Chairman. For several weeks investors bought the Aussie unit as the dollar’s spiral lower created a sense of self-fulfillment. But now as dealers begin to focus on the dollar value of a fresh round of easing, commonsense appears to be the order of the day. In light of this the Aussie has shed exactly two cents to 98.00 U.S. cents this morning. Against the yen the Aussie also declined to ¥80.22.

Canadian dollar – The Bank of Canada meets Tuesday to determine its next move. On the eve of that meeting the market predicts a less than one-in-10 chance of a further interest rate increase. The weakness of the U.S. economic picture is a significant external distraction to Governor Carney and his team as to make them sit tight-lipped on the sidelines possibly through next spring. The Canadian dollar has so far given back 240 pips of its Thursday visit to parity with the U.S. dollar and now stands at 97.95 U.S. cents.

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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