After a rocky start to Friday’s trading, the dollar has regained its poise and is flitting between gains and losses against a basket of currencies on the session. The greenback had lost some appeal throughout the week following a steadfast showing from the central bank where it appears there is little chance that monetary policy is about to be changed. Global tensions dimmed after the Egyptian overthrow of its President while there was little further safe haven demand for the dollar as tensions slowly spread across the Arab world. Much of the driving action later in the week has come from Europe where investors keep on picking at the stitches in monetary policy hoping that they might soon be able to tear it apart at the seams.
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British pound – Attracting much of the spotlight this week was the pound sterling where investors have been clamoring for signs that the Bank of England would soon raise interest rates. Inflation rose to twice its permitted ceiling causing the Governor to write a fifth open letter to the Chancellor explaining why this is the case and what he intends to do about it. Despite internal policy dissent from external MPC members the central bank sounded off loud and clear that it sees no need to risk negatively impact growth in order to address a rising cost of living that it deems temporary and driven by beastly rising commodity prices. In an unexpected twist to finish the week weather-weary consumers drove retail sales back from the winter doldrums to the strongest advance since February 2010. While sales excluding cars and fuel surged by 1.6% and far faster than a 0.5% forecast, the series was revised far lower for the previous month, but investors were still taken aback by the ferocity of the rebound. The pound jumped sharply to reach $1.6231 for its highest in at least two weeks as investors began to sense that there may be room for monetary tightening after all.
Euro – The euro was having a bad hair day on account of an uncomfortable surge in German producer price costs, which rose by twice as much as forecast. The January index rose by 1.2% lifting the year-on-year gain for factory input costs at 5.7% and up from 5.4% in December. And while investors have been incredibly sensitive to signs that simmering inflation might spark a response from the ECB, more recently they have been told to lay down their pitchforks and relax. The ECB like several other central banks observes that the global rebound is dragging commodity prices higher and that over time this trend will dissipate. Yet there were two pieces of news that weighed on sentiment towards the euro this morning. First, French business confidence for February unexpectedly stumbled to an index of 106 from 108 despite expectations of an advance. This is one of a few recent signs that buoyancy in the region is petering out. Second, data from the ECB showed that banks remain heavily reliant on borrowing from the central bank. Borrowing at the marginal lending facility on Thursday rose to €16 billion and is the highest since June 2009. So despite concerns over inflation the rising price profile investors rounded on the euro in the belief that all is not well and that the simmering sovereign debt issues might yet weigh upon its appeal. However, just to illustrate the fickle and fluid nature of this market it was a recent headline flashing across dealers’ screens that sent the euro sharply higher after ECB member Bini Smaghi warned that the central bank might raise rates if price pressures mount. The euro reversed a daily loss to $1.3550 to reach a session high at $1.3619.
U.S. Dollar – The dollar index weakened to 77.85 following Bini Smaghi’s comments. Of course the dollar doesn’t have anyone representing the remote likelihood that monetary policy will respond to high-flying cost pressures. All of the growth excitement surrounding the dollar appears to have gone into hibernation for now. The Fed has reiterated that despite the economic rebound, it’s the likely lack of impetus in the labor market that keeps it on hold keeping investors more likely to turn to the dollar as a carry trade victim for now rather than a prospective candidate for rising yields.
Japanese yen – With little to upset risk appetite overnight the yen is also suffering from the same style of weakness as the dollar in that investors continue to short it in exchange for high yielders or equities and bonds outside its waters. The yen relaxed a tad against the dollar, which recently bought ¥83.42. The euro rose to buy ¥113.73.
Aussie dollar – The Aussie appears in good shape against the dollar although it’s unable to end the week on as high a note as it squeaked on Thursday. With no economic data to report overnight, the unit is a little softer against the dollar at $1.0100 U.S. cents. In overnight trading the Aussie surpassed its best level of Thursday to reach a one-week high at $1.0137 cents.
Canadian dollar – A tame consumer price index from Ottawa this morning has left the Canadian dollar largely unchanged against its U.S. counterpart. January consumer prices were unchanged on the month causing the annual pace of change to fall to 2.3%, while the Bank of Canada’s favored core CPI reading was also unchanged after a December decline of 0.3%. The annual core rate slipped to 1.4%. The tame report pulled the rug from beneath the crowd arguing for a monetary tightening to some degree. However, the health of the Canadian economy is unambiguous and is likely to deliver what might best be described as a perfect storm for Canadian policy makers. The local dollar currently buys $1.0166 U.S. cents and unchanged from Thursday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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