Dollar higher with nervousness in all other quarters

Investor nervousness manifests itself in many ways. For weeks and months buyers have loaded up on equity prices around the world, uncommitted as many other bulls, yet nervous that they are missing the rally. That trend recently accelerated sending equity prices to peaks not seen in two-and-a-half years. And owners of the exchanges upon which these investors trade have, once again, decided that they can’t wait any longer as they face the choice of merge or be bought. Today the dollar is rising reflecting its appeal as a safe haven as nervousness about the future hits home.

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U.S. Dollar – Mr. Bernanke softened his tone over the glacial melt in the labor market and reminded lawmakers that the fiscal hurdles beyond the next several years will only get worse. Even though his words immediately invited dollar bears in to the ring, the blows haven’t inflicted any lasting damage with the rebound as furious as the initial onslaught. Globally equity prices are lower for a second day inspired initially by Tuesday’s Chinese monetary tightening. Hong Kong stocks fell by 2%, while the MSCI Asia Pacific index lost 1%. European benchmarks also face similar losses. The dollar index is 0.6% higher at 78.08 ahead of initial claims due out later on Thursday. Dealers expect a small decline to 410,000.

Euro – A midweek surge for the euro beyond $1.3700 following Bernanke’s testimony at Capitol Hill and its first in six days came to a crashing halt on Thursday as prolonged stock market losses raised the stakes. In addition the story that Buba Chief Weber is unlikely to run for ECB Presidency in October is apparently a softening on inflation and as a result is weighing on the euro. While it’s true that Herr Weber is the most hawkish of the ECB members, it’s unlikely that the ECB won’t stick to the script in the months and years ahead. The inflation trajectory won’t look any different two or three years forward with a different captain at the helm. Nevertheless, such nervousness is challenging the euro on Thursday with the unit reaching a session low of $1.3614 and looking every bit like it’s about to accelerate the decline on a healthy U.S. initial claims reading. French factory data for December was relatively robust with industrial production rising albeit at a far lower pace, when investors had looked for a dip. Manufacturing output also contracted at a far lower pace than forecast.

Japanese yen – The dollar maintained higher terrain against the Japanese yen and rallying towards its best in two weeks. The dollar hit ¥82.87 at its best. The yen did manage to rally against the euro and Aussie although hit a brick wall to trade lower versus the British pound.

British pound – Thursday is Bank of England day and as the world and its mother predicted, that meant no-change in monetary policy settings at the central bank. The statement was short and to the point and left little room for opinion, of which there is currently no shortage. Many people believe that the Bank is failing in its objectives evidenced by a pace of inflation at almost twice the 2% ceiling set by the government. However, the underlying cause is tax-driven as the government deals with its budget as well as fuelled by an acceleration in commodity prices and therefore largely out of the control of the Bank. Indeed it’s becoming a common central bank theme that such challenges are externally caused and can or should be little influenced by changing monetary settings. And while this field of analysis might have received much internal analysis at the Bank of England, officials face quite a challenge in convincing the outside world, including those close to understanding its operations, that it hasn’t gone soft on inflation. Two external members continue to vote for adjusting policy upwards to prevent inflation taking hold, while they were joined by former committee member DeAnne Julius who claimed that the Bank should strive to maintain its credibility by acting “sooner rather than later.” The Bank will unveil its latest projections for the medium-term price and growth prospects next Wednesday in its quarterly inflation report. The pound dropped to its lowest in eight sessions following the announcement before a recovery and it currently buys $1.6043.

Canadian dollar – The loonie faces a double-headache on Thursday in the shape of weakening sentiment to equity investments and lower crude oil prices. The domestic dollar spent the previous day back and forth over the unchanged mark all day in response to Bernanke’s remarks over the U.S. labor market. Isolated strength in Canada’s labor market is meaningless without a wholehearted recovery to its southerly major export market. Ahead of U.S. initial claims data the Canadian dollar is lower at $1.0020 U.S. cents.

Aussie dollar – Take a rock and drop it and you’ll have a good idea of how the Aussie dollar performed against the dollar after the January employment report. At its worst point (arguably we haven’t yet seen it!) the Aussie slipped to buy $1.0027 U.S. cents despite a stronger than expected jobs report. The economy generated 24,000 jobs although the statistics bureau said that flooding in Queensland hindered its data collection and may have weakened the reliability of the data. However, the devil is in the details of the report, which when cracked open shows that full-time job appointments actually declined by 8,000 meaning that 32,000 part-time jobs made all the running. The data reduced investors’ expectations that the central bank will be as quick to hop back on the monetary tightening train again causing nervousness over the health of the Aussie.

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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