Dollar lower after China data, but rebounding fast

Ahead of what promises to be a highly eventful week, the dollar is struggling to recover from losses sustained in the Asian and European sessions in response to a rebound in Chinese manufacturing output. An earlier PMI survey showed that manufacturing activity jumped dragging prices up in the rear. Wednesday’s FOMC statement is critical with the prevailing fear of a large second wave of stimulus drowning the dollar. Friday’s employment report for October could actually prove mildly bullish for the dollar after glimmers of hope in the latest readings of initial claims. This morning, however, the dollar is firmly on the back foot as risk appetite flows over sending investors into riskier asset classes at its expense.

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U.S. Dollar – The dollar’s trade-weighted basket pared its earlier slump and is now lower by 0.1% at 77.10. The catalyst for earlier dollar-sales came from Beijing after both official government and private HSBC PMI surveys reported an upturn in the pace of manufacturing activity throughout October. The government reading showed increasing expansion as the index rose to 54.7 despite expectations of a static performance of stable expansion. A reading of 50.0 indicates neither expansion nor contraction while readings below indicate contraction. The dollar appears to be the victim during the present climate of healthier growth expectations, especially since observers expect further stimulus to be announced this week, further eroding its value.

Japanese yen – The yen pared recent gains following the positive reading from China. Asian stock markets advanced and there was less of a perceived need for safe haven units. Investors are also wary of chasing the yen ahead of central bank events this week. Last week the Bank of Japan brought forward its November meeting to tailgate the party at the FOMC. It’s highly likely that the Japanese will somehow manage to find further ways to ease policy if the Fed does if only to prevent remedial U.S. action from impinging further on the Japanese economy through the transmission mechanism of a strengthening yen. Recently the Bank of Japan noted it would include ETFs and REIT investments as assets it would include in its stimulus fund. The yen rose marginally to ¥80.35 per dollar while making some ground also per euro today at ¥111.94.

Aussie dollar – The Reserve Bank meets Tuesday to decide whether or not a 4.5% short term rate of interest is enough to keep the domestic economy in check. The export order books at mining companies have been rising as China buys more resources from the mineral-laden nation, which in turn has kept the Aussie dollar afloat. An AiG index of manufacturing performance during October rose to 49.4 indicating only a marginal level of contraction compared to September. The index remained in contraction territory for a second consecutive month as the sector faced sluggish domestic demand and has to compete with more competitive suppliers overseas in the face of an ever-strengthening Australian dollar. Within the report, a sub-index of employment showed, however, that job growth resumed expansion. The Aussie dollar rose to 98.74 U.S. cents in New York.

British pound – The pound rose towards its strongest against the dollar in nine months and was heading towards its best reading per euro in four weeks. Following last week’s GDP report that proved twice as robust as was expected, the British index of manufacturing surprised analysts by rising rather than falling. In addition the previously reported September reading was revised higher. The U.K. PMI reading came in at 54.9 for October after a reading of 53.5 in the prior month. The pound reached $1.6043 after the data as investors tried to second-guess the Bank of England’s Thursday decision over whether or not to buy more bonds.

Euro – An earlier surge in the euro that had strengthened the single currency to $1.3996 has ended in a backlash driving the unit to an intraday loss. The euro currently buys $1.3919 according to Interactive Brokers data on an uneventful day in Europe. Notable, however, is that the situation remains vulnerable to whimsy. The boost to Asian stocks earlier carried over to 1% gains for major European indices only for each to slide back into negative territory on the day.

Canadian dollar – bullish risk appetite regardless of a reversal in the euro has buoyed the Canadian unit with rising commodity prices pushing up the Canadian dollar to 98.33 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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