China upstages Bernanke speech

IB FX Brief: China torpedoes Bernanke speech with further tightening measure

Fed Chairman’s Bernanke delivered a speech in Frankfurt in defense of his central bank’s second round of bond purchases, lashing out in coded fashion against China’s failure to allow its currency’s rise. The flow of news headlines from Germany was rudely interrupted by the Peoples Bank’s communication that it was further restricting banks’ ability to lend by raising reserve ratios effective Nov. 29. Investors were already walking on eggshells this morning wary of signs of further imminent monetary tightening.

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U.S. Dollar – The dollar index remains 0.4% lower this morning at 78.26 after the Chairman’s message. Mr. Bernanke said that in order to restore global growth it was in the world’s best interest that the Fed put in to place measures that would return robust economic growth. In turn this would underpin the value of the dollar, proving allegations from officials in both China and Brazil that the Fed has sought to deliberately weaken its currency causing potentially destabilizing capital inflows into their economies. Mr. Bernanke warned implicitly over China’s failure to allow its currency to rise in value, warning that eventually nations who persistently undervalue their currencies risk further financial stability at home.

Euro – Talks in Dublin are likely to continue into the weekend, while investors have warmed to the idea that Ireland will accept help reducing recent fears over contagion within the Eurozone. The single currency rose to on Friday to trade at $1.3717. Earlier data from the German Federal Statistics Office revealed an uptick in producer prices paid by manufacturers in October. The monthly pace of change at 0.4% translates into an annual price increase of 4.3% after a reading of 3.9% last month. The data further strengthened the euro to end the week. Even if an agreement is struck between the joint parties visiting Dublin and the Irish government, investors are likely to turn their attentions to the next victim. In this case the next basket case in line for a beating is Portugal.

British pound – The pound fell for a third day in four against the euro, which today buys 85.48 pence. The pound earlier took advantage of weakening appetite for dollars and surged to a peak of $1.6094 before sliding to a mild loss in early New York trading at $1.6036.

Japanese yen – The Japanese yen remains marginally ahead against the dollar at ¥8336 but is fast losing steam to the recovering greenback. Tokyo stocks were little changed to end the week and provided little direction to the value of the yen.

Aussie dollar –The Aussie was buffeted overnight by the warmer waters surrounding the euro as sovereign Irish fears waned amid ongoing discussions in Dublin and persistent chatter that China was on the verge of further measures to cool its economy. In early New York trade, the Aussie has now slumped to 98.57 U.S. cents as stock market futures indicate a weaker opening to end the week. The Australian unit also lost ground against the yen declining to ¥82.15.

Canadian dollar – The Canadian dollar remains a little higher buying 98.02 U.S. cents this morning. Thursday provided a return to risk allowing key commodity prices to recover, which also helped buoy the loonie. The currency also tends to perform well on signs that the U.S. economy is recovering. Thursday’s Philadelphia Fed survey, which was stunningly strong, created further appeal for the Canadian dollar.

Andrew Wilkinson

Senior Market Analyst

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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