A coded Japanese warning to expect the unexpected and the forecast of a shrinking Chinese trade deficit have reversed the surge for Asian currencies against the dollar today. The rising greenback is also adding downside pressure to formerly ebullient commodity prices, which in turn is weakening demand for riskier and higher-yielding growth sensitive assets.
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U.S. Dollar – There seems to be a challenge to Monday’s consensus that the G20 pledge over allowing free markets to discover equilibrium prices. A Chinese commerce minister noted today that his nation’s trade surplus this year will be smaller than that of 2009. At the same time the gradual appreciation of the Chinese yuan is slowing notably and today there is a generally despondent tone in the air today. The dollar index is higher by 0.4% at 77.42 as investors bank gains generated in the run up to the weekend meeting or simply rush for the exits today in confusion, forced out by souring trades.
Aussie dollar – A third quarter poll published by NAB showed rising business confidence at an index reading of 9.0 after a return of 3.0 in the previous month. However, the Aussie shed almost a cent from an earlier high at 99.25 U.S. cents to 98.36 cents. Investors are primed for a midweek report showing third quarter consumer price data, which may add to pressure for further interest rate increases from the RBA.
British pound – A strong third quarter reading for GDP set the cat amongst the pigeons today and was reinforced by a return to a stable outlook from Standard & Poor’s credit rating agency. The unit said that the cohesion between the coalition partners in aiming to restore public finances on to a more sustainable path was enough for it to remove the overhang of a negative credit outlook. The pound shot higher after growth accelerated from a 1.7% year-over-year pace to 2.8%. The growth rate for the third quarter came in at 0.8% and twice the consensus estimate. The pound came close to trading at $1.5900 as pound bears were forced to consider the possibility that the central bank might now have time on its side before acting to further stimulate the economy. In the grand scheme of things the Bank of England likely faces little choice but to embark on a further round of stimulus in light of the necessary fiscal stance enacted by the coalition.
Japanese yen – To act or not to act? According to Fumihiko Iragashi of the Finance Ministry currency intervention is most effective when the market is least expecting it. His veiled warning came ahead of a meeting between the Chief Cabinet Secretary Yoshito Sengoku and a member of Mr. Iragashi’s team who discussed the global economy and exchange rates. The conspiracy of events spooked investors who reversed the yen’s recent trek to a 15-year high. This morning the dollar has rebounded to as high as ¥81.42 and above Monday’s weakest moment a whole yen lower.
Euro – Monday cheerleading in support of the euro was insufficient to lift the single currency anywhere close to last week’s peak despite the fact the dollar was in virtual free fall. The dollar’s reversal today is stealing yardage back from the euro, which this morning cheapened to as low as $1.3879.
Canadian dollar – The Canadian dollar is roiling on to its back foot this morning as commodity prices feel the pressure of a rising greenback, which deters demand for hard assets as alternative investments. The loonie sank to an intraday low at 97.27 U.S.cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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