Dollar loses ground as risk trade comes back

IB FX Brief: Commodity pair under pressure as bankers leave rates alone

Investors keeping an eye on Middle Eastern concerns continued to tiptoe back into riskier investments in response to generally positive data from all corners of the globe. It seems that the world is learning to live with crude oil prices in excess of $100 per barrel –in the case of the Brent contract. Manufacturing data around the world continued its expansion causing a smoother backdrop to events, which in turn invited further pressure on the dollar.

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U.S. Dollar – Should the February ISM survey of purchasing managers confirm analysts’ expectations later this morning it would indicate that the U.S. manufacturing sector is running at its fastest pace in seven years. However, whatever the outcome the headlines will be competing for eyeballs with those from Chairman Bernanke’s Senate Banking Committee at which he will give his twice yearly assessment of the health of the U.S. economy and outlook for monetary policy. Mr. Bernanke is likely to indicate that the economy is doing well, but not well enough to justify the FOMC stopping in its tracks as it maintains open market purchases of bonds for another four months. Other data today will likely show amelioration in the pace of contraction within the construction sector. A report for January is expected to show a 0.5% pace of decline following a 2.5% dip in December. On Monday the dollar index reached its lowest since August 2008 and this ahead of today’s data is only marginally weaker at 76.87.

Japanese yen – Gains for risk appetite have put a dampener on an advancing yen along with the Swiss franc. As stocks regained their poise investors let go of the Japanese unit and especially so after several encouraging pieces of domestic news. January payrolls rose by 170,000 according to government data helping maintain a 4.9% rate of unemployment. Household spending contracted but by less than forecast during January with a 1% decline. In December the same report showed a 3.3% slide. The yen lost ground against the dollar to ¥82.25 on Tuesday but also weakened to ¥83.56 against the Australian dollar and ¥113.42 per euro.

Euro – The single currency was further spurred on by a rise to 10-month peak for manufacturing across the Eurozone during February. The 16-nation wide PMI rose to 59 while a separate report showed the unemployment rate slipped to 9.9% in January. The euro stalled ahead of Monday’s peak and could only manage a session peak at $1.3853. Bulls are getting behind the euro ahead of Thursday’s ECB policy meeting out of which there is a growing expectation that the central bank will deliver tough rhetoric on the state of inflation and a possible need to act. This potential widening in the euro’s yield advantage is helping garner support for the unit.

British pound – A surprise increase in the reading of Nationwide’s house price index for February sparked further gains for the pound lifting it above $1.6300 to a 12-month high. The building society was expected to indicate a further monthly drop in home values of 0.2% but confounded us all with a gain of 0.3%. Meanwhile Britain’s manufacturers continued to exude confidence with a February PMI matching that of the prior month at 61.5. The only black spot within the day’s reports was a dip in the January reading of net consumer credit of £300 million following an upwardly revised credit expansion of £800 million in December. Gains for the pound proved unsustainable with the pound falling back to trade at $1.6263 ahead of U.S. data.

Canadian dollar – The Bank of Canada left monetary policy unchanged at 1% on Tuesday and after the crowd ran the local dollar to its highest reading since November 2007 when it last bought $1.0300 U.S. cents. Given the excess slack in the economy and the threats to global recovery the Bank maintained its view that further adjustments to monetary policy would need to be carefully considered. The unit duly sank to $1.0270 cents.

Aussie dollar – The Aussie faced a tough day following its rise to an eight-month peak on Monday. Today the Reserve Bank left its policy stance on hold and seems to be increasingly likely to remain that way. It referred to its posture as mildly restrictive and now says that inflation on a 12-month forward view is likely to remain within its 2-3% target range, stealing some appeal from those brave enough to buy the Aussie in search of yet tighter monetary policy.

Andrew Wilkinson

Senior Market Analyst

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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