Risk aversion meets G20 commitment on currencies

Friday is proving to be an eventful day even before Wall Street opens. The dollar index reached a five-week high after Asian stocks fell sharply with the Shanghai benchmark falling by the most in 15 months. However, the dollar is on the other end of a beating after the G20 meeting in South Korea concluded with a joint statement endorsing gradual changes in exchange rates. In Europe, third quarter growth slowed causing the euro to lose further focus dragging its value to the weakest in six weeks.

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Euro – Germany’s third quarter pace of growth eased as global demand cooled export demand. And while the Eurozone’s most powerful manufacturing force was still growing at a decent pace, it doesn’t take away from the fact that regional activity slowed to a 0.4% pace compared to a 1% pace in the prior quarter and meaning the economic area expanded at a 1.9% pace over the year through September. The expansion soured in the Netherlands where the economy stagnated by 0.1%. In addition, Eurozone industrial production during September slid 0.9% on the previous month leaving the reading ahead on the year by 5.2%. And in the backdrop is the plight of peripheral nations’ and their fiscal mess. A joint statement made by several European officials in South Korea on Friday aimed to reassure worried Irish and other bond holders of peripheral nations’ debt that a crisis resolution mechanism would not implicate outstanding debt. The euro touched a low on the day at $1.3573 for its weakest since the end of September.

U.S. Dollar – The dollar moved sharply in both directions overnight. Investors are once again shooting themselves in the foot on signs of economic strength out of China. Worrywarts are hopping scared that a pick-up yesterday in consumer prices to the highest pace in two-years will be enough to inspire the Peoples Bank to further tighten monetary policy. That philosophy saw the Shanghai composite index lose 5.2% overnight for its biggest daily decline in 15 months. In the wake of weaker risk appetite and a shakeout for commodity prices the dollar surged. However, it seems that the G20 statement has perhaps reversed the course for the greenback. The statement noted that nations would endeavor to develop what leaders called early-warning indicators that would avoid “uncoordinated policy” that might deliver “worse outcomes for all.” This is a build on the theme developed in the recent meeting at which imbalances were identified. Failure to deal with them appropriately might thus lead to individual solutions that today the G20 warns would worsen the situation. Later this morning the University of Michigan’s consumer sentiment index is expected to rise for the first month in three, which would contrast the development of growth between Europe and the U.S. That could further boost the dollar, whose index against a basket of common trading partners is lower by 0.2% at 77.99.

British pound – Sterling dropped sharply overnight following the release of a Nationwide consumer sentiment index. The report dipped one point to an index reading of 52 in September to show the weakest reading since March 2009. But what tripped up the pound today was the expectations component of the report which slipped harder and reached a 19-month low. As a result the pound slumped to $1.5986 after the report but post G20 statement is flying high at $1.6117.

Japanese yen – The yen strengthened on a risk aversion theme with Tokyo stocks losing more than 1%. The yen rose against the dollar to ¥81.72 at one point before a dollar recovery to a current reading of ¥82.12. The yen also rose to its strongest reading in two months against the euro rising to ¥111.05.

Aussie dollar – Risk appetite swooned overnight as investors fretted over a Chinese response to firming inflationary pressures. Commodity prices were hit hard and the prospect of a further cooling off period for growth across Australia’s major export region saw investors quit the Aussie dollar overnight. The unit slumped to 98.25 U.S. cents before it could recover to 99.13 cents.

Canadian dollar – Like its Australian counterpart the Canadian dollar suffered at the hands of sliding commodity prices and a broad fallout for stock prices. It earlier reached 98.50 U.S. cents and currently buys 98.99 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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