Risk trade continues to fluctuate

IB FX Brief: Dollar spikes after ADP jobs optimism

Risk appetite has swung from off-to-on throughout the European session. Investors initially embraced the dollar following a resurgence of weakness in equity prices, inspired in turn by a resumption of foul play in the crude oil market. But a couple of key pieces of European data have pushed back the dollar’s attempt at a rally and at the same time the U.S. market appears set to open on an improved footing this morning. An ADP report showing a healthy rebound in private sector employment in the United States has curiously erased an earlier gain for stock prices and enraged speculation that demand for oil will continue to outstrip supply.

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U.S. Dollar – Very little of the dollar’s activity can be attributed to comments made to the Senate on Tuesday by Fed Chairman Bernanke. He stuck to his guns about the pace of economic recovery and continued to point out that much of the recovery was owed to the effectiveness of the Fed’s strategy. As such there was no need to change the script and he still sees “several years” before the labor market improves. While investors build a head of steam about the implications of rising crude oil prices on inflation and activity, the Fed Chairman sounded far more sanguine, although said he’d remain flexible. Mr. Bernanke said that commodity price increases won’t leave a major hallmark on the pace of consumer inflation and that he doesn’t expect them to have a lasting effect. The reversal in the dollar index from weak to firm as equity benchmarks extended losses on Tuesday was the first time in a while that the greenback had risen to the growing bout of risk aversion. I’d expect that to continue if the equity markets reverse pre-market gains throughout the day. On the agenda today is the ADP private employment report, which showed that 217,000 new jobs were created. The report came out better than forecast to show a second strong month of growth for jobs. The dollar index rose off its worst levels of the day to stand at 76.90.

Japanese yen – Asian equities were weaker overnight with the Nikkei sliding by 2.4% as Middle East unrest spread. The Libyan situation remains captivating with Qaddafi’s jet fighters continuing to attack protesters. Unrest spread to Iran where anti-government protests turned violent in Tehran. Fears continue to spread that Saudi Arabia could be the next boiling pot and as such has kept a flame burning beneath the price of crude oil, which again breached $100 in New York today. The yen is losing ground per dollar today and stands currently at ¥82.00 while it’s lower against the euro by about 0.5% at ¥113.28.

Euro – the euro dropped by more than a cent from its Tuesday peak to a little below $1.3750 as European stocks followed Asian equity prices lower. However, a morning report showed a surge in costs facing producers during January erasing losses for the euro sending it to a session high at $1.3841. Following the stronger U.S. ADP report the euro made a bee-line for $1.3800. Investors continue to favor the euro ahead of Thursday’s ECB meeting at which many expect a change of tone following an upwards trajectory for consumer prices. The January PPI report was stronger than forecast and showed a monthly gain of 1.5% - almost twice the pace forecast – to leave prices higher on a year-on-year basis by 6.1%. The annual pace stepped up from 5.3% in December.

British pound – The pound was once again propelled higher after yet another data surprise. This time it was a sharp rebound in construction activity as indicated by the purchasing managers’ index, which had been forecast to drop but in the event rose from 53.7 to 56.5. The pace of expansion had dulled over the severe winter and to an extent the positive impact on activity owing to a return of milder weather shouldn’t be such a surprise. The pound was lower before the report and like the euro attempted a stab at Tuesday’s session high. Again, the pound had shed one whole penny’s worth of gains against the dollar ahead of today’s report. The pound reached $1.6325 before the U.S. ADP report, which caused it to falter badly reaching $1.6275 immediately after.

Canadian dollar – Good news for U.S. employers quickly translated into merry-making for the Canadian unit, which only benefits from an improvement in the health of the U.S. economy. The Canadian unit reversed a loss in the early session to $1.0225 making a run higher by a half penny to $1.0275. While the Bank of Canada dismissed the need to increase interest rates only yesterday blaming in part the upside impact of a strengthening local dollar, crude oil prices have once again surged ahead of the U.S. opening bell further enflaming demand for the loonie.

Aussie dollar – The Aussie weakened amid an in-line GDP report for the fourth quarter but hampered by the prediction from Treasurer Wayne Swan who noted that first quarter GDP would be damaged by flood and cyclone damage. To be honest this rationale seems to assume that no one had spotted the impact on growth, but perhaps it was simply the fact that he stated a 0.25% dent in the pace of current quarter growth. Today’s report showed that at the end of 2010 the economy grew by 0.7% meaning the yearly pace of GDP growth rose to 2.7%. The Aussie dipped in the earlier part of the day declining against the dollar to a four-session low at $1.0085 amid the biggest decline in a week for the MSCI Asia Pacific index of 1.5%. The Aussie later rallied to an intraday gain before swooning as rampant crude oil prices made a mockery of the ADP jobs gain, which only put further pressure on equity prices.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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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