Dollar weakened as risk appetite increases slightly

Risk appetite is mixed heading into a weekend during which there appears to be a strong likelihood of a further tightening in Chinese monetary policy. The dollar is heading lower as investors nibble at riskier propositions, while the euro is finding it hard to progress under the weight of growing tensions over debt crisis management. A weekend Franco-German summit is unlikely to deliver an olive branch to other EU members asking for an extension to the available pool of bailout funds.

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China– Overnight data from China revealed still strong expansion in the shape of a jump of around one-third in measures for both imports and exports during November as the mighty trade surplus dipped marginally to $22.9 billion. Banks were asked to stump up more deposit reserves with the Peoples Bank of China after new yuan loans rose by more than expected. It looks like the central bank has been rather ineffective in massaging down loan amounts it permits this year causing it to step up its monetary measures. Forecasters expected new lending to total 500 billion yuan last month but the volume of loans only fell 4% to 565 billion. A series of monetary measures grew at a 20% pace on the month. Over the weekend President Hu Jintao and Premier Wen Jiabao hold an economic summit to discuss an economic plan and monetary policy for next year. Expectations for a weekend rise in interest rates have been fanned by the early delivery of inflation data this weekend. While investors expect a consumer price index change of 4.7% year-on-year, domestic sources have reported an even higher prediction that would offer the authorities an opportunity to coincide events with a rise in interest rates.

U.S. Dollar – The dollar weakened just a little with the index lower at 79.93. On Friday the main piece of data to watch for is the Michigan consumer confidence reading.

Euro – Joint German and French opposition to expanding the euro-area bailout fund is potentially setting the single currency up for a difficult week ahead. Chancel Merkel and President Sarkozy meet today and are unlikely to drop their opposition to enlarging the already agreed upon amount of cash to support ailing nations. Elsewhere German Foreign Minister Guido Westerwelle argued in Italy’s Corriere della Sera that Germany won’t cede the sovereignty of its debt management in order to support the sale of euro-region bonds. He said that the idea of pooling national debt in order to share risk as “unacceptable.” He also said that profligate nations had no incentive to maintain discipline. Today the euro is having a hard time moving ahead against the dollar and stands at $1.3245 as the view of the horizon continues to look unclear.

British pound – The pound nudged forward to its highest in a fortnight at the end of a week in which investors pushed a domestic index of equity prices ahead by 1.2%. Stubbornly strong food and gasoline costs through November kept producer prices running at a yearly pace of 3.3% yet confirmed that demand remains buoyant. The pound jumped against the dollar to trade at $1.5819 while it advanced per euro to 83.74 pence.

Japanese yen – The yen is stronger against the dollar overnight but at ¥83.68 is off its intraday peak at ¥83.45. The yen remained dominant in Asian trade as investors prepare for the possibility of monetary tightening in China. The hourly chart pattern is beginning to look interesting to dollar/yen prospects with the development of a “bullish wedge” from which the dollar could surge if the pattern is triggered. The Wednesday dollar high at ¥84.30 and subsequent peak at ¥84.09 in Thursday’s trading provides resistance to the upside. While support from the midweek low at ¥83.71 connects with Friday’s ¥83.45 provides a gentle support line. Such a formation is common after a surge in the price of a commodity such as seen in the dollar/yen pair this week when the dollar surged from ¥83.35. The subsequent lull gives the appearance of a pending reversal or failure and is bordered by a wedge-like formation. In this case I’d suggest that a break above ¥83.85 would see the dollar target at least ¥84.30.

Aussie dollar – The Aussie saw mixed trading overnight. The prospect of Chinese monetary tightening that might put a dent in exports to its main trading partner weighed on the Aussie in Europe keeping it lower against the dollar. But in early New York trading as risk appetite edged forward the Aussie was bid up to a session-high of 98.97 U.S. cents. It has since pulled back a little.

Canadian dollar – The Canadian dollar is little changed on the day and remains hemmed into a rather narrow range. The unit has been unable to take advantage of firmer risk appetite as the week progresses and doesn’t seem to like the air above 99.00 U.S. cents. On the downside investors have scooped up the loonie at prices below 98.60 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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