IB FX Brief: Risk-on-risk-off
In a sense there is no doubting the risk-on tone in pre-holiday trading as optimistic investors have driven the S&P 500 index back above the point at which it was trading ahead of the watershed collapse of Lehman Brothers. Evolving confidence that the U.S. economy really is pulling away from those dark days is also reflected in growing industrial production at Asian plants whose number one customer is of course the U.S. consumer. Risk appetite is thereby sapping demand for the dollar as investors seek to take advantage assets around the world of presumably lower risk these days. But hold on just a second. European currencies have again reversed course indicating all is not clear on at least that horizon.
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U.S. Dollar – The dollar was under earlier attack and fell against just about everything. Its index against a basket of trading partners slipped 0.4% overnight. The European tone seemed better or at least no worse, while rate-increasing commentary swathed the pound and the Asian currencies felt the thrust of risk appetite driving them skywards. Dealers anticipate a healthy batch of data in New York to include rising consumer confidence within the University of Michigan survey, steady jobless claims and a slight gain in consumer spending. Typically volatile durable goods orders are expected to dip but excluding transportation orders should have risen during November. The growing confidence around the world in the health of the U.S. economy has put a minor dent in the dollar. However, the playing field appears to be uneven and no one seems to trust the same prospect for the debt-laden peripheral nations of the Eurozone. The dollar index has consequently reversed course and ahead of today’s data is now higher on the session. Of course the dollar has historically been tainted by the Fed’s quantitative easing policy, although outright recovery since the second wave was announced last month has detracted from this process and indeed has boosted its fortunes. In an interview midweek, Philadelphia Fed President Charles Plosser said that the FOMC may be forced to cut short its bond-purchase scheme next year if the current momentum in growth is maintained. That would seem to be another check-mark next to the list of reasons to be long the dollar.
Euro – The plight of the Eurozone is another reason to be long the dollar and that’s showing up once again this morning. An overnight jump in the euro this time to $1.3151 depicts an ongoing downtrend for the single currency with savvy investors clubbing the euro bulls each time they poke their heads above the turret. The euro has since fallen once again and trades near its $1.3084 low point ahead of the U.S. data reports. French consumer spending data was the only noteworthy release ahead of the vacation weekend and displayed a healthy 2.8% monthly increase through November. In isolation the report was insufficient to support the euro. Investors are long accustomed to the return of health to its core economies, while officials and ministers wrangle over how to deal with slow growth facing the peripheries and their unhealthy budget deficits. The euro eased against the pound to 84.90 pence.
British pound – The Markets Director at the Bank of England in an interview with London’s Daily Telegraph warned that British interest rates will eventually normalize at round 5%. To Paul Fisher it’s important that consumers are aware of this fact and must bear it in mind when making decisions. The pound took a boost following the publication of his views rising against the dollar to $1.5436 before appeal for the pound waned leaving the unit nursing intraday losses. It has recently rebounded. There was something in what Mr. Fisher had to say for bulls and bears. With any recovery from an economic earthquake of this magnitude Mr. Fisher warned that the volatility of GDP data was to be expected and that it shouldn’t be a surprise if the economy even contracted for one quarter as a result. Despite the latest rebound and faster pace of growth reported for the third quarter, the end of the year is proving to be quite a challenge as the worst snowfalls in 150 years are proving tricky for retailers despite earlier signs that consumers were rushing to beat the New Year deadline of a higher sales tax as part of an effort to reduce the deficit. Mr. Fisher felt that a 0.5% increase in interest rates wouldn’t be sufficient to cause a recession and predicts that the Bank of England would only increase rates so long as it didn’t cause a negative reaction.
Aussie dollar –The Australian dollar has surged overnight purely as risk-appetite improved. Regional stocks jumped and minor Asian units continued to climb against the greenback. The Aussie reached a session high at $1.0048 before giving back a quarter of a penny. Key commodity prices rose further supporting the appeal for the domestic currency. In the recent month the Aussie surged 4.7% against the U.S. unit while year-to-date it is the second biggest gainer with a near-12% surge.
Japanese yen – The dollar accelerated to the downside against the yen overnight and was pushed beneath the down-channel I depicted here yesterday. Overnight buyers of yen emerged after the Chinese Ministry of Commerce made an effort to curb foreigners’ speculative efforts to binge on domestic property. The yen rose to ¥82.86 on safe haven grounds before the dollar sought back to buy ¥83.25 and returning back into the channel. Japan is today closed for a holiday.
Canadian dollar –The Canadian dollar faces the challenge of monthly GDP data for October on Thursday morning with investors hoping that the outturn will be better than the previous 0.1% contraction. Expectations are for a positive display of 0.3%. Today the Canadian unit has weakened in the face of resurgent appetite for the dollar and despite above $90 per barrel crude oil. The loonie today buys 98.29 U.S. cents ahead of the datasets and is on the session low.
Senior Market Analyst
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