Dollar bucks conventional wisdom as yen swoons

Contrarian themes are crawling to the foreshore midweek with many investors tripped up by the emergent price patterns. The dollar is sky rocketing against the Japanese yen setting off a technical pattern that could see its value surge further. Commodity dollars are doing the opposite of what they should be doing when gold, copper and grains explode upwards. Meanwhile the Chinese authorities have caught the wobbling bulls unaware as they strive to further head-off the potential for future asset bubbles.

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Japanese yen – For many months now investors have piled into the Japanese currency for want of a better place to go. The trade became sufficiently crowded that the yen’s value became a policy headache for the government and led to just one bout of unilateral intervention so far. The Bank of Japan’s action served to light a fire beneath the yen over the next several weeks as investors sought to find out just how irate they could push the central bank. It was the Chinese government, however, that saw the light in realizing that this move couldn’t continue eternally and they recently became net sellers of Japanese government bonds. With yields perilously low and with little room to fall further, any investment would rely heavily on yen appreciation. Thus China turned its back perhaps a little prematurely, but judging by today’s continuation of a surge in the dollar, they might have chosen the right path. The dollar/yen pair has built a near perfect flag formation, bullish for the dollar. Yesterday’s sharp move up for the dollar from around ¥80.62 consolidated at ¥81.75 for several hourly periods before starting over again. The bullish break out of the bullish flag formation heralds a likely near-term move to ¥83.25, which is still asking a lot from the current intraday peak at ¥82.42. The yen hasn’t traded that low since the first week of October.

U.S. Dollar – The decline of the yen has reversed an earlier loss in the dollar index albeit from a strong close on Tuesday. The dollar binged on a further contrarian movement in the treasury markets where dealers had been frightened to sell treasuries given the gorilla-like presence of the Fed in the room. Yields had largely remained static only for yesterday’s lurch higher to provoke investors into recognizing that the economy is not only moving ahead, but it has an additional and sizeable tailwind in the form of a total of $900 billion of treasury purchases behind it. The dollar suddenly doesn’t look so bad and as that fact prompts key positions to play out in short-covering the entire jigsaw puzzle suddenly looks vastly different. Dallas Fed Chief Richard Fisher yesterday told Fox Business News that “all of us want a strong dollar and want to make sure it is of great international standing.” He slammed the folks on the hill for failing to get their acts together over fiscal control and delivering measures that would incentivize business. Watch out for initial claims data this morning, a day earlier than usual on account of Veteran’s Day tomorrow.

Euro – The single currency continues to trade poorly. The unit’s relief was driven over the summer purely by the huge improvements in the health of German and France, coincident with a revival in emerging economies. Yet the perilous state of peripheral nations’ finances was merely dealt a provision for how to deal with future crises and it’s my guess that market forces will attempt to bring it bear down on such a crisis once more before the year is out. The euro fell to its lowest in two weeks and remains close this morning at $1.3780 according to Interactive Brokers data.

British pound – A worsening of the inflation profile has detracted yet again from prospects that the central bank will reignite its bond purchase program – a move that we had all thought was a done deal merely two weeks ago. The Bank of England in its quarterly inflation bulletin delivered earlier said the nearby inflation profile had worsened while the balance of risks at the end of its two-year forecast period was bang on target at 2%. No longer is the long-term forecast for inflation to fall short. The report spurred dealers into a buying frenzy and helped recoup some of Tuesday’s losses that dragged the pound to its lowest in five sessions. Governor King has a recurring monthly Outlook calendar appointment prompting him to write to Chancellor Osbourne in explanation as to why inflation continues to breach the 3% ceiling. Today he warned that he’s likely to have to do the same again next month. The pound recovered to $1.6100 from $1.5997 ahead of the report. It also continued to outflank the ailing euro and rose to 85.66 pence.

Aussie dollar – With prices of commodities around the world responding to a pick-up in final demand as well as a recent slide in the value of the U.S. dollar in which most commodities are priced, you’d think that the Aussie dollar would be on fire. Relatively speaking it is and trades at exactly $1.00 with the greenback this morning. Last week’s surprise interest rate increase at the RBA is lost, however, in the current rebound for the U.S. unit leaving the Aussie vulnerable to the slightest whiff of weaker data. The Aussie had traded up to $1.0172 on Tuesday but demand above parity is fast-eroding. Today there was further evidence of a resilient housing market as September data showed an above forecast value of home loan approvals. Investment lending for the month also reversed a decline in the previous month. Meanwhile a Westpac consumer confidence report declined by 5.3% dragging the index down to 110.7. Tomorrow brings a crucial employment report that is likely to create more gyrations for the Aussie. The report should show an eight straight month of employment gains albeit at a slower pace than during September. Dealers will be trying to determine whether the report will prod the RBA into further action before year end.

Canadian dollar – The Canadian dollar remains static against the U.S. unit and today buys 99.58 U.S. cents. Tuesday’s foray above parity was quickly reversed as the greenback strengthened despite a record reading for the price of gold.

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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