Dollar rampant ahead of weekend on Egyptian fears

Dealing with the unexpected has sent the dollar surging overnight in response to President Mubarak’s unpredicted decision to extend his stay in office until September. Making matters worse is news that the nation’s armed forces back his plan and will aid the transition over time. The consequence is a crescendo in the roar from the thronging masses descending on Cairo’s Tahrir Square. Heading into the weekend during which anything could happen and, very likely will, the only chance traders are willing to take is that the dollar’s safe haven status will send it higher on a day when a further sign of domestic strength might reveal a rise in consumer confidence to its highest in seven months.

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U.S. Dollar – The dollar index jumped after Mubarak addressed his people and said he’d not listen to the voice of an increasingly hostile outside world. The dollar rose by 0.4% to 78.58 against a basket of currencies as investors ran for cover seeking its safety ahead of the weekend. Later on Friday morning the University of Michigan will release its January consumer confidence reading, which is predicted to show a further improvement as households improve. If the index matches the expected reading of 75.0 it will be the best performance since June. Investors keep changing their take on the dollar between its use as a funding vehicle as the global economy recovers and as an outright bullish play. A recent slide in bond prices has changed investors’ perceptions over the dollar’s role as a carry trade victim. The spike in bond yields has burned many investors as borrowing costs rise and with the tailwind of widening yield spreads further boosting the dollar’s appeal.

Japanese yen – Testimony to the dollar’s changing role in the carry trade arena is today’s ascent for the greenback to its highest against the yen since January 7. The dollar bought ¥83.68 making for a weekly rise from last Friday’s close at ¥82.37. The dollar was bought against most Asian currencies at the end of the week after the People’s Bank of China set its daily reference rate for the yuan at its strongest in several weeks and the Bank of Korea unexpectedly left monetary policy unchanged.

Aussie dollar – Governor Stevens appeared in front of a parliamentary committee on Friday to discuss the economy and monetary policy. He came across as content with current policy and described monetary conditions as being “on the firm side” adding that policymakers had deemed it “sensible of late” to leave interest rates unchanged. Expectations of any further rise in interest rates quickly diminished and added to the risk-off nature of trading in light of events in Egypt, the Aussie dollar slumped right through par with the dollar for the first time since January 31 and touching down at 99.60 U.S. cents.

Euro – The euro is losing out to the dollar and is also hampered by growing concerns that the sovereign debt crisis is on the verge of reemerging. The euro reached a session low at $1.3508 matching Monday’s low. German consumer prices for January dipped once again between months but the annual pace nudged higher to a 2% pace.

British pound – Former Bank of England outsider Kate Barker turned conventional wisdom on its head, making traders think about the plausibility of sterling-supportive increases in interest rates. She noted that the Bank is likely to be highly wary of fuelling the pound though a rise in interest rates in a move designed to control inflation but that would undermine growth. Recognizing that the integrity of the Bank is challenged at a time when inflation is nearly twice its target and growth has had “the wind taken out of its sails” Ms. Barker rephrased the burning issue of credibility facing the Bank. If the MPC voted to now tighten monetary policy to address inflation and caused a crush to growth at a time when the economy is already hamstrung a whole new consensus over its credibility would emerge with people likely to ask, “Do we really want these people running our economy?” Ms. Barker noted that exporters who have benefitted from a decline in the level of the pound since 2007 could easily afford to see sterling weaken from its current levels in a move that would benefit the broader economy. The pound slid on Friday to $1.5963 before rebounding to above $1.6000.

Canadian dollar – The Canadian unit aced a nice combination on Friday, not only hanging on to the coat tails of a firmer greenback, but also uplifted by rising crude oil prices s perceived tensions in the Middle East flared. The loonie shrugged off an earlier decline to the greenback to $1.0014 U.S. cents before edging back to an unchanged $1.0044 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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