A surprise jump in the Chinese benchmark rate of interest and some tough talk from U.S. Treasury Secretary Geithner helped put the dollar on the offensive for a second morning. The jump in the dollar is accompanied by a dip in the yen this morning, which could yet allow the Bank of Japan to pinpoint the sort of currency volatility that would allow it to intervene. Of course when the dollar is in free fall and the yen is rising, the Bank of Japan finds it less tasteful to intervene. But the return of the right-type of volatility might just play in to its hands.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc.
U.S. Dollar – When all else fails, one instinctively knows it’s time to resort to Treasury-101 – discuss the mandate of the strong dollar. That’s precisely the stunt Timothy Geithner performed this morning and reiterated that the interests of the U.S. are best served by a strong currency, reflective of its role in the global economy. He noted that no nation can win or benefit from currency devaluation saying that the U.S. was not in that game and that he will work towards preserving confidence in a strong currency. The rhetoric appears to have paid off even if only temporarily with the dollar index on the gallop this morning rising 0.9% to 77.66 against a basket of trading partners.
Japanese yen –The dollar is challenging the yen to a four day high after the Peoples Bank of China lifted its one-year deposit rate by 25 basis points earlier this morning and after China’s markets had closed. This is another attempt to blow cold air on its domestic economy and is a negative for risk appetite around the world. According to Interactive Brokers data the dollar rose to ¥81.69 following the Chinese move and following Geithner’s remarks. If there was ever a good time for the Bank of Japan to intervene, it might be now justified on excessive volatility. The Bank of Japan only faces a hard time when the dollar is being sold against all crosses and given its rise today a whiff of intervention might provide a significant tailwind.
Aussie dollar – Following the Chinese benchmark adjustment American stock index futures turned sharply lower as investors rushed to lock-in profits. Conceivably, the move to cool the world’s second-largest global economy bites into the prospects for global growth and therefore investors’ appetite for risk. And as a result the Aussie tanked on the news. Earlier in the day the unit was buoyed by the prospect for a widening of the yield cushion offered by the Australian dollar. Minutes from the October RBA meeting warned that rates simply must rise “at some point.” Nevertheless the credit market was offered a stay of execution for several reasons. The central bank perceived the near-term prospects for growth to be at about trend. Credit growth had recently cooled somewhat and its strengthening domestic currency was acting as a virtual monetary tightening. Together these factors permitted a reprieve for now at least. The currency rallied on the headline view that the RBA was not yet done and shot to 99.60 U.S. cents but quickly cratered as the optimistic bulls hoping for a sliver of incremental yield were fast disillusioned. The Chinese measure to cool its economy saw the Aussie unit get slammed to the canvas and recently hit a New York session low at 97.77 cents.
Euro – The euro is lower against the dollar having recently hit a session low and is trading at $1.3865. The single currency was well supported earlier after sentiment indicators covering the Eurozone proved stronger than forecast. The reading for the German economy from Mannheim-based ZEW showed an especially strong response from locals about the current economic situation. The index jumped to a three-year high at 72.6 in October from 59.9. Investor confidence, however, slipped to its lowest since January 2009 by falling to -7.2. The decline may be the result of a perceived global slowdown making respondents pessimistic over the prospects for overseas demand.
British pound – The British pound slid all the way back to $1.5725 against the dollar and also slipped per euro to 88.12 pence. Dealers await Wednesday’s offering in the shape of minutes from the October monetary policy meeting and details of the budget spending review. The MPC might be closer to agreement on adding a second-round of bond purchases, which now seems to be weighing on the pound. Until recently the fact that further quantitative easing was on the cards in Britain was swept under the carpet simply because it would be easily overshadowed by the same event in Washington. And while that was a dollar negative, only now is the growing likelihood deemed a threat to sterling. Today an index of factory orders slipped to a six-month low as optimism over export orders wanes.
Canadian dollar – The Bank of Canada meets to decide whether to raise interest rates later this morning and ahead of its decision the local dollar has fallen by more than a cent to 97.22 U.S. cents. Perhaps dealers have been served warning from the RBA minutes that a rising currency acts as a brake on growth and with the local dollar at a four month high at a time when the U.S. economy is in check, the reality of a rate rise today is a non-event.
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.