The day after a retail sales report showing the strongest consumer performance in seven months, the pressure is off the dollar as a variety of negative factors conspires to detract the appeal of currency alternatives. European Union officials meeting in Brussels are serving up a suggestion to Ireland that for the sake of avoiding ongoing bond market turbulence, it should consider an early-bird rescue package that would allow it to prop up its crumbling banking system. There is every chance that Ireland may well want to ponder loss of control and further weigh its options for a while longer, causing investors to remain cautious about the single European currency.
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Japanese yen – Tokyo can hardly complain about this week’s events thus far. Third quarter GDP was bullish despite an appreciation of the yen from ¥92 to ¥83 during the three months ending in September. And now data within the U.S. economy is improving gently enough to inspire the dollar, some of the pressure is off the yen, which has edged towards its weakest point in six weeks. During this time of improving conditions overseas, this in turn takes further pressure off Japanese exporters whose goods become more competitive to overseas buyers. The Bank of Japan, which during the summer months faced the difficulty of dealing with a rising yen on account of worries about overseas demand, suddenly finds that the uphill challenge has dissipated with the market now doing the hard work for it. The dollar rose to buy ¥83.33 according to Interactive Brokers FX platform this morning.
U.S. Dollar – The dollar index remains poised to strike further above its strongest level in six-weeks. In an interview with the Wall Street Journal, Fed Vice Chairman Janet Yellen said that the recently announced second-round of quantitative easing was justified given the Fed’s objectives and was neither intended to depreciate the dollar nor boost inflation above 2%. Such comments are dollar-friendly and often what it takes to shake investors from their blues over a situation. In this case the dollar’s decline ahead of the FOMC announcement was a direct result of a snowballing view that the Fed was debasing the dollar. Data this morning should show that industrial production during October got back on track to support the economic recovery after slipping during the previous month for the first time in more than a year. The dollar index is currently unchanged at 78.60.
Euro – The gravity of the woes facing Ireland and other peripheral nations remains a dead-weight on the single currency, which reached a session low at $1.3595 this morning. However, the tone was lifted earlier following the release of the German ZEW report showing both the current and expectations indices rose above forecast. The economic situation reading recovered from a negative reading of -7.2 to 1.8. Price data for the Eurozone was slightly above forecast at 1.9% and rose from a downwardly revised figure in September.
British pound – Chancellor King had to pen a fourth letter from Threadneedle Street to Downing Street in order to outline to Chancellor Osbourne precisely why inflationary pressures again breached the upper limit of the Bank’s 3% ceiling. In October consumer prices in Britain rose 0.3% between months to stand 3.2% higher than a year ago. Some believe that the pound will benefit from the Bank of England’s inability to justify further quantitative easing on account of price pressures. However, the pound suffered more than most against both the euro and the dollar today. The pound slumped after the release of the data touching $1.5980 at its worst point of the day so far. One euro today buys 85.09 pence.
Aussie dollar – Minutes from the recent meeting at the Reserve Bank at which a 25 basis point interest rate increase was deemed to be prudent, revealed a fine balance in the need to act at the time. As such the Aussie dollar came under pressure as traders pared expectations over future changes to monetary policy. The unit traded towards its weakest in two weeks touching down at 97.84 U.S. cents at one point. There was a negative bias to Chinese media reports stating that authorities may need to adjust policies in 2011 on account of inflationary pressures. In addition, the government may need to start setting limits on food prices and take action against speculators in agricultural futures markets. Shanghai stocks fell by 3.5%. It’s important to realize, however, that while there has been a negative tone to news coming out of the world’s number two economy, the tone is due to rising activity and consumption that may require remedial action, but is hardly a sign of impending slowdown.
Canadian dollar – The Canadian unit slumped in early trade against the dollar and fell to 98.29 U.S. cents at one point. Ahead of a manufacturing sales reading for September due this morning, the loonie has recovered to 98.60 cents. The Canadian dollar is more insulated from a reversal in commodity prices on account of a turn in the greenback than is the Australian dollar, which is trading on the heels of Chinese activity.
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.