Dollar stable ahead of Bernanke testimony

Forex markets have little fresh meat to devour midweek. Asian investors gave a thumbs-down to the latest Chinese measure to cool its domestic economy souring the European tone for stock markets. A market story that Bundesbank hawk Axel Weber won’t attempt to step into the shoes of President Trichet when he steps down as head of the ECB prompted a flurry of selling in the euro. But when all is said and done, there is very little action going on.

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U.S. Dollar – Investors will be keen to hear Fed Chief Bernanke’s latest take on the health of the U.S. economy. After all its return to health has helped prop up global stock markets with investors hungry to hear of the Chairman’s endorsement. The dollar index stands at an unchanged 77.95 midweek with remarkably little movement across most currencies as data-starved traders face few compelling influences today.

Japanese yen – The yen weakened to its lowest point against the dollar in 10 sessions on Wednesday despite a strong reading for machine tool orders, which rose 89.4% on the year earlier. The dollar rose to a high of ¥82.66 not seen since Jan. 28 and before an ensuing two-session decline to ¥81.35. The recent strong string of gains for commodity and equity prices along with monetary tightening across emerging Asian economies appears to be providing a greater demand for dollars rather than yen. No matter how far ahead dealers look in the distance, they can’t see the Bank of Japan facing a need to change its stance. The same can’t be said for the United States where monetary policy movements tend to be more dramatic. Japanese consumer confidence rose to 41.2 in January from 40.2 at the end of 2010.

Euro – The euro also gained against the yen rising to buy ¥112.67 and rebounding from a low of ¥110.76 reached last Friday after U.S. unemployment fell sharply. Reuters news today said that Bundesbank President Axel Weber would drop out of the succession race and would not pursue the vacancy to be left when ECB President Trichet steps down. The euro lost a little ground versus the dollar declining to $1.3611 following a stronger start. However, the single currency later recovered to trade higher once more at $1.3643. With little on the economic calendar investors pored over German trade data where both exports and imports were expected to advance by around 1% during December. In the event export orders maintained a 0.5% pace of growth while import orders declined by 2.3% on the month.

British pound – The British pound also has few driving influences ahead of Thursday’s meeting at the Bank of England although analysts predict no change in policy as an outcome. It’s also likely that when minutes are released in a couple of weeks the voting split will remain three-ways. The pound rallied to reach $1.6100 in early trading buoyed by an upwards revision from trade body CBI, which raised its 2011 inflation forecast from a December reading of 3.3% and now predicts that consumer prices will average 3.9% this year. That would be just about twice the Bank’s 2% target rate. A British Retail Consortium report also showed food price inflation for January running at its fastest pace since August 2009. Dealers tested downside room after the opening rally with the unit declining to as low as $1.6044 before stabilizing.

Canadian dollar – The Canadian dollar rose in line with a rebound for the price of crude oil and reached $1.0069 in early trading. The greenback has pared losses to stand at $1.0056 in quiet trading.

Aussie dollar – The Aussie dollar continues to retreat from what’s increasingly looking like a top-formation against the U.S. unit. The Aussie has been buoyed by recent predictions of a rebound to growth in the second half of the year as the nation rebuilds after January flooding. To many investors, a strengthening of the economy means further currency supportive monetary policy tightening. However, with Asian bourses reacting negatively to Tuesday’s late-in-the-day interest rate increase from China, the Aussie is increasingly finding the going tougher. The unit is 0.4% weaker versus the greenback and buys $1.0107 on Wednesday morning.

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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