Dollar sentiment reverses as FOMC nears

Dollar buyers appear to have resumed an offensive play overnight helping to lift the dollar basket off a one-week floor. Behind a midweek gain for the dollar is a changing interpretation of the impact of next week’s highly probable second round of quantitative easing from the Fed. Dealers now see the growth stimulus as a good thing for the economy.

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U.S. Dollar – Dealers are testing the resolve of the dollar’s rally in early New York trading with the dollar index off its earlier highs. The index touched 78.14 earlier before trading at 77.87 at around 7a.m. Until recently investors ran scared of the dollar and interpreted potential policy steps as indicative of a desire to cheapen the currency and flood the economy with money. That view is finding little follow-through support as analysts settle for a more conservative consensus number on what the FOMC might announce when it meets next week. Data today is forecast to show the strongest reading of durable goods orders in five months. The report is expected to indicate a 2% jump for September having declined by 1.3% in August. New home sales data for the same month is expected to jump by 4.2% off a record low pace of 288,000 units.

Aussie dollar – The Aussie lost out to the greenback as the argument of a widening yield differential took a chink in its armor following a weakening in consumer price inflation. Data for the third quarter showed a 0.7% increase to leave annual inflation running at a 2.8% pace and down from 3.1% in the second quarter. The central bank’s preferred measures, which exclude items displaying big price swings, also eased and caused dealers to sharply pare back expectations of further interest rate increases. The RBA meets next week and, based upon the fact that the level of price increases is now returning back into its 2-3% average target range, dealers are calling for an extension to its five-month long hiatus.

British pound – Opinion is growing divided on the prospects for the pound. The recent weakness incited by the growing likelihood of further monetary easing was punctuated on Tuesday by a report showing a surging pace of economic growth in the recent quarter. Some sense that this is enough to allow the Bank of England to keep its plans on ice through January. The decision to announce further measures, however, is convoluted by the impact of fiscal policy, which is likely to act as a dead weight on the chest of the economy going forward. The pound remains lower against the dollar at $1.5824 this morning but continues to bite back against the euro, which today buys 87.20 pence.

Japanese yen – Volatile conditions surround the yen once again today. With no signs of intervention, the story is really one of a sharp dollar rebound, which drove the yen back to within an inch of ¥88.00 before nervousness saw the yen fight back to stand at ¥81.44. There was no economic data out of the island overnight other than a decline in a reading of small business confidence.

Euro – A dip in the pace of M3 money growth around the Eurozone is a marginally negative factor in today’s trading but hardly a game-changer. There remains plenty of other data supportive of the view that the economy remains on the right path. Nevertheless the euro was a big loser against the dollar and slid to as low as $1.3771 according to Interactive Brokers data, drawing it closer to its weakest in seven days.

Canadian dollar – The Canadian dollar has also given back more of its recent gains after Bank of Canada Governor Carney sounded the alarm bell on currency intervention while addressing Parliamentary officials on Tuesday. The central bank recently scaled back its expectations for growth partly on account of the difficult conditions facing the U.S. market, while partially finding fault with a strengthening domestic currency. Mr. Carney warned that the persistent strength of the Canadian currency had the “potential to seriously influence Canadian economic growth. We have options in those circumstances.” The loonie continues to lose value and is close to its intraday low at 96.87 U.S. cents ahead of U.S. data to be released at 8:30am.

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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