Dollar rally intact despite lame CPI data

Dealers continue to adopt a cautious view on the single European currency as Finance Ministers board planes and trains having exchanged views over Ireland in Brussels. According to Irish Minister Brian Lenihan, talks involving the EU, ECB and IMF will start tomorrow over the possibility of a bailout for Ireland. Still he refuses to assure onlookers that any deal is cast in stone. The first step is for the parties to pour over the books of the banks in an effort to conclude whether the Irish government can manage without the blow of assistance from the EU’s €750 billion rescue fund intended for situations such as this. Ireland has to weigh up the loss of face attached to the intervention associated with an aid package against the resulting stresses in global capital markets caused by its predicament.

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Euro – As a result the euro is having a hard time keeping its legs underneath it. Not only that but the rebound in the dollar ever since the Fed announced a second-round of bond-buying is forcing investors to reassess the assertion that the central bank is even deliberately attempting to weaken the currency. At its weakest moment in volatile Tuesday trading the euro hit $1.3448, which isn’t far beneath the current value of the euro at $1.3483. One suspects that another wave of euro bulls might be forced out of their positions should that low point cave today. Sovereign risk seems to be a key driving force despite the fact that economic recovery has made its mark in 2010. The biggest risk is that Ireland decides it can hack the course alone leaving much reliance on Mr. Lenihan’s four-year deficit reduction plans to be laid out on December 7 in the budget. Yet a successful trip to Dublin may mean the next stop will be Lisbon followed by Madrid creating further loss of appeal to the euro.

British pound – British employers unexpectedly created 3,700 new jobs in October bringing the claimant count to 4.5% following a positive revision to September’s data. The ILO count, which standardizes the comparison across nations, dropped to 7.7%. The challenge ahead will be whether the currently positive trend among private businesses in creating jobs will come close to offsetting the near half million jobs lost as a result of stringent budget cuts announced in October as the coalition government tackles a towering budget deficit. The pound reversed an earlier gain against the dollar to as high as $1.5938 before trading to $1.5883. Governor King told lawmakers in the House of Lords that further stimulus may still be needed and that just because the risks surrounding the two-year inflation forecast were currently symmetrical, that doesn’t mean it could be overstating the final outcome. He continues to believe that the existence of tremendous excess capacity or slack in the economy will bear down further over time meaning that the central bank may have to ratchet down its inflation predictions ahead.

U.S. Dollar – The dollar index fell following a weak raft of morning data. Mortgage applications in the week ending November 12 slid by 14.8% while data showed October housing starts running at a weak annualized pace of 519,000 for an 11.7% drop on the prior month, where data was also revised down. The outlook remains dull after permits indicating builders’ intentions also remained weak at 550,000. Consumer prices for October came slightly lower than expectations at 1.2% year-on-year and 0.6% ex-food and energy. The index trades at 79.21.

Japanese yen – Since Tuesday’s break-up in the dollar taking the yen down to an eight-week low of ¥83.59, the yen is being sold (and the dollar bought) on rallies to ¥83.25. The Japanese stock market improved overnight on yen weakness while other regional markets continued to feel the ill-winds of Chinese threats to impose price limits on agricultural products in an effort to stifle budding inflationary pressures. The yen eased against the pound today to ¥132.56 and against the euro to ¥112.57 while the Aussie rose to buy ¥81.46.

Aussie dollar – The perceived risks to higher-yielding currencies emanating from sovereign troubles in Europe and actions by China to curb inflation weighed on the Aussie once again. China’s Premier Wen Jiabao, speaking on state television, claims to be drafting measures to counter price gains, raising the prospect of weakening demand in Australia’s biggest export market. The Aussie is currently trading at 97.75 U.S. cents but appears thwarted by twice-tested resistance above at 98.00 cents. A Westpac leading indicator employing September statistics was unchanged in a report released today.

Canadian dollar – The Canadian dollar has calmed since it appeared traders jettisoned the unit in yesterday’s washout. A U.S. dollar strengthening was sufficient to cause many long commodity traders to ditch positions across gold, silver and crude oil markets along with anything else commodity related. The Canadian dollar today buys 97.78 U.S. cents today having hit a low earlier at 97.42 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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