Dollar on the rails as carry trades boom

The U.S. dollar is faring badly to end the week in which the European rate tightening cycle boosted the appeal of the single currency. As global central bankers respond to better economic activity and pressures stemming from inflation, a general rise in risk appetite has buoyed equity prices, which in turn is putting carry-trades back in focus. The Canadian dollar turned sour on a lackluster labor report and would likely have fallen further had the greenback not been on the defensive on Friday.

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Canadian dollar – The biggest monthly decline on record in the number of part-time jobs in Canada more than offset a strong gain in full-time employment. The net loss of 1,500 jobs dulled enthusiasm for the Canadian dollar disappointing expectations of a net gain of 15,000 positions. Retail and wholesale workers lost most jobs alongside healthcare and social assistance workers. Manufacturing jobs also dipped. The food service industry and accommodation workers made gains as did the construction sector. The public sector shed 27,200 jobs while private employers added 8,300 positions as the overall rate of unemployment fell to 7.7% maintaining a significant gap beneath the U.S. rate, which last week dropped to 8.8%. The loonie had made an optimistic gain ahead of Friday’s data to $1.0473 U.S. cents only to slide on its release by a half cent. The unit last traded at $1.0559.

Aussie dollar – The Aussie keeps on punching through the clouds against the dollar as broad demand for high-yielding units once again becomes the trade du jour. Surging equity prices in Asia ensured that benchmark indices finished the week in bullish mood causing additional demand from investors deploying funds overseas. The unit touched a fresh record high against the greenback at $1.0545 while it added more than 1% against the victim of the carry trade, the Japanese yen to ¥89.81.

Euro – The euro continues to find favor in the aftermath of the first interest rate increase for three years and given the currently perceived low likelihood that the Federal Reserve is on the cusp of tightening, left investors with a bias towards the single currency. A February trade report from Germany showed a pick-up in exports at the strongest pace since September adding to the view that recovery remains robust. The euro remains near its strongest point of the day at $1.4421 making it the highest price since January 2010.

Japanese yen – Rising appetite amongst investors wanting to spread their wings into higher-yielding overseas assets resumed selling the yen and buying anything offering better prospects. The Nikkei stock benchmark continued its recovery overnight even after a strong earthquake on Thursday. Investors continue to view the yen as more likely to weaken in light of the recent disaster as the Bank of Japan becomes increasingly isolated as other central bankers entertain the idea of leaving extraordinary monetary stimulus behind. Reports of a 7.3 magnitude quake on Thursday had caused the yen to jump against the dollar reaching ¥84.60 before the frenzy wore off. On Friday the dollar remains more appealing than the yen and has risen to ¥85.31.

British pound – The British pound again leapt on account of inflationary data only to see gains quickly erode. The currency remains in the black on the day and at the day’s best against the dollar at $1.6426 rose to a 15-month high. Today’s driving data came in the shape of producer prices, which during March rose faster than predicted. The cost of goods leaving the factory gate rose by a faster 0.9% on the month leaving the pace 5.4% higher than one year ago. Core output prices when seasonally adjusted rose at a modest 3% compared to last year. Input prices gained 3.7% on the month leading to a 14.6% surge year-over-year. The pound lost out per euro to 88.10 pence.

U.S. Dollar – The dollar index is 0.5% lower on the day and has penetrated the significant November low. Monetary tightening may be underway in parts of the world and Thursday’s ECB move was the first time in 40 years that the European rate-rising cycle eclipsed the lead of that of the Federal Reserve. There is a significant risk that the yield spread between the pair will widen again as the rate setting in Europe is lifted even before the Federal Reserve has finished the crumbs of its open market asset purchase plan.

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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