Commodity dollars see gains as growth hopes rise

A mix of growing risk appetite and search for higher yield is working against the dollar on Thursday. Equity index futures rose inspired by gains for European stocks while the nation of Portugal took a step closer to requesting a financial rescue package from its neighbors. Investors brushed aside the potential for greater contagion and looked through to practically guaranteed higher interest rates in April coming from the European Central Bank.

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Euro – Despite a Moody’s downgrade of 30 Spanish lenders midweek and the resignation of Portugal’s Prime Minister following his government’s defeat on a bill to reduce the budget deficit, investors flocked to the euro in search of a rising yield premium. The ECB has warned that it wouldn’t be a surprise to see a tightening in monetary conditions on April 7 when it next meets and that rhetoric continues as representatives warn over the need to nip rising commodity prices in the bud before wage negotiations manifest an erosion of living standards. The euro rose to buy $1.4140 ahead of U.S. data and after data showed a cooler reading from purchasing managers in the manufacturing sector. The diffusion index slipped to 57.7 from 59.0 and came in shy of forecast while the services sector expanded marginally. Overall the composite PMI slipped from 58.2 to read 57.5. The euro rose against the Japanese yen to ¥114.41.

Japanese yen – The yen continues to flat-line versus the greenback for a fourth consecutive day. Dealers won’t push for a strengthening of the yen in the safe knowledge that the G7 lurks beneath the surface in dollar terms. Meanwhile there is little incentive to sell the yen until the all-clear is sounded. The dollar buys slightly below ¥81.00 yen on Thursday morning.

British pound – Chancellor Osbourne shaved a penny off gasoline prices at the pump in Wednesday’s budget and shifted the burden on to banks and oil producers. The budget revised growth lower in the face of sharp cuts in spending, deteriorating consumer confidence and buffeted by rising job losses. A retail sales report for February sank sentiment towards an increase in interest rates as shoppers bought less than analysts suggested. A headline decline of 0.8% in sales came after the imposition of a sales tax increase and coincided with rising costs at stores. Department store sales fell by the most in two years coincident with weakness in consumer confidence leaving forecasters searching for clues over where the next spurt in growth might spring from. Consumers are facing rising costs on all fronts. Earlier in the week official data showed the cost of living rose at 4.4% year-on-year, while today’s retail reports confirm the point that consumers’ pocket books are stressed. Price deflators indicate that all sales items rose by 2.4% last month rising to the highest in 17 years. All retail items rose by 3.9% in February compared to a year ago with the food deflator rising by 5.3%. The pound struggled against the dollar and fell sharply for a second day to $1.6150 as investors holding the pound lost further conviction that the Bank of England will stand by its inflation-fighting mandate when growth looks as visibly shaky as it does.

U.S. Dollar – Recent indications show that the health of the manufacturing sector has picked up and that consumers are becoming more confident in their purchase decisions. Initial claims data released later today should see little change from the prior week’s reading of 385,000 first-time benefit claimants. Also scheduled for release is a durable goods report estimated to show rising demand for goods meant to last more than two-years. The dollar continues its weakening trajectory in the face of returning confidence to global stock markets and as commodity prices continue to gain momentum. The dollar index remains marginally weaker at 75.75 ahead of today’s economic reports.

Aussie dollar – The Reserve Bank in its semi-annual Financial Stability Review said that the nation’s banks and insurers were sufficiently well-capitalized to absorb the series of natural disasters that had bitten the country. Risk appetite is back on an upswing overnight and has led to buying of the Aussie lifting its value against the dollar to the highest in just over two weeks. Today the Aussie buys $1.0182.

Canadian dollar – Recent evidence on the economy has shown a marginal slowdown and coupled with a rising domestic dollar the Bank of Canada doesn’t have much to do at present. A stronger currency has kept inflationary pressures in check while government measures to restrain excessive borrowing habits have cooled consumer demand. The result is a Goldilocks economy growing not too fast and not too cold. There remains a potential election in the wings with a campaign trail likely to keep the Bank of Canada at bay although at this point the need to change its stance looks unnecessary. The price of oil has burst through $106 per barrel on Thursday and with equity index futures higher, the Canadian unit is in demand and buys $1.0236 as it unwinds damage inflicted after a report showed weakness in consumer spending earlier this week.

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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