A late-night Congressional deal angering liberal Democrats has provided the framework for agreement on a two-year extension of Bush-era tax cuts fueling risk appetite in early Tuesday trading. Equity futures indicate a smart bounce for stocks on the open while key commodity prices have firmed in response to improving demand prospects while bonds are lower forcing yields higher. The dollar is losing ground as sentiment favors riskier propositions driving investors in a year-end rally into the unknown.
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U.S. Dollar – President Obama reached agreement with Republican lawmakers ending months of wrangling and calming a sea of uncertainty by extending tax rules set to expire at year end. In exchange the President secured an extension of federal unemployment insurance. Businesses and investors alike have been critical of the lack of certainty caused by political failure to agree ahead of the recent elections. The dollar index fell 0.4% in response to the overnight dealings as investors embraced riskier propositions now that another tier of uncertainty has been removed. Later today consumer credit data for November will be released.
Euro – EU officials yesterday agreed neither to enlarge the €750 billion bailout fund nor to pre-empt potential crisis in either Spain or Portugal by offering a bailout now. The single currency recovered some ground versus the dollar overnight after piercing $1.3250 on Monday, reaching $1.3395 as the dollar edged lower following agreement over expiring tax codes. Some onlookers are watching for a further rebound in the single currency should an Irish budget containing €8 billion in spending cuts pass through its Parliament. The smooth passage will be a tight vote but is a pre-requisite to the recently agreed upon €85 billion aid package for the country. The euro rose marginally against a strong British pound and buys 84.76 pence while also adding 0.4% against the Japanese yen at ¥110.51.
British pound – An increasing appetite for risk helped bolster the pound towards its best level in nearly two weeks against the dollar. Although industrial production data for October dodged expectations, manufacturing production saved the day by coming in at twice the forecast for a 0.6% monthly rise leaving output 5.8% higher than a year ago. Demand for the pound was also inspired by a retail report showing a firm consumer trend from the British Retail Consortium. It said that sales at stores open for at least 12 months rose by 0.7% and compares to a previous monthly gain of 0.8%. The pound hit $1.5822 according to Interactive Brokers data before declining to $1.5783.
Japanese yen – Japanese Finance Minister Noda said he’d resume his beady watch over the yen whose moves became “one-sided” again on Monday. A rising yen harms exporters by reducing export demand and translates to weaker earnings. The yen stands little changed this morning at ¥82.62 per dollar.
Aussie dollar – The Reserve Bank left monetary policy alone on Tuesday and in its statement said that the level of interest rates was appropriate. Governor Stevens words have undone much of the pent-up optimism that surrounded the Aussie dollar by denying the market an extension in the yield premium offered by the unit. The Governor scotched expectations of a rate rise in the first half of 2011 by saying that the currency’s strength helps tame price pressures “at the margin” but also noted that inflationary pressures were likely to be well-controlled during the first half of next year. Further, creditworthiness concerns in the Eurozone were also a risk. His parting shot was of limited use to investors hoping for further interest rate increases. He warned that both growth and inflation will move higher in the future should the economy expand according to longer-range forecasts. The Aussie has risen to its highest in three weeks this morning as risk for higher-yielding assets increases and stands at 99.57 U.S. cents.
Canadian dollar –The Bank of Canada announces its take on the economy shortly, although no one expects any accompanying change to monetary policy. The loonie remains near its strongest point from Friday as demand for commodities and improving attitude towards the United States, its largest customer, improves. The Canadian dollar today commands 99.61 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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