Investors swept any remaining crumbs of comfort off the table and seemed more prepared to dig in against any reprisal terror attacks following the death of Al-Qaeda’s leader. Risk aversion was already evident in Monday’s trading as fading gains for benchmark equity indices were accompanied by rising costs of insurance against a pullback. Not helping matters on Tuesday is a tumble in commodity prices reinforced by slowing manufacturing activity in the world’s two leading economies.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc
U.S. Dollar – The dollar index is making a brave move back to its highest in three sessions as risk aversion kicks-in with the index higher by 0.2% to 73.22. Pre-market equity index futures are trading below Monday’s weakest moment offering promise of an interesting session ahead. A factory orders report is scheduled mid-morning covering March data and is expected to rise by 2% following a February decline of just 0.1%. Any further weakening for risk appetite following bin Laden’s death could conceivably boost the dollar as riskier bets are pared.
Euro – The single European unit is also at its weakest in three sessions and trades at $1.4783 against the dollar having shed more than a penny overnight from its best level since July 2008. Producer price data for March was fairly much in-line and as such failed to boost any further the view that the ECB is likely to raise interest rates faster than currently expected. The 0.7% monthly increase stacks up in to an annual gain of 6.7% and builds on year-ago pressure by the slimmest of margins. The euro also slid by 0.9% against a rising yen where it recently bought ¥119.32.
British pound – The pound was devastated by a slide in the index for PMI manufacturing released earlier reversing five days of curious gains. The pound had gained at the dollar’s expense lately on the view that even if it’s a remote possibility, the Bank of England is likely to tighten its monetary stance ahead of the Fed. Today’s slide in the Markit Economics and CIPS manufacturing index to 54.6 was made all the worse on account of a negative revision to the March reading of 56.7. Today’s negative news for manufacturing helps put the pound back on an even keel with the dollar with dealers selling the pound to reflect that lack of advantage. The pound was also delivered a wooden horse in the form of a CBI retail sales survey, which despite its improved headline number showed the weakest outlook for sales in two years and confirms a recent slide in consumer confidence. The pound fell from its heady Monday peak of above $1.6700 to trade at $1.6467.
Japanese yen – Asian stocks fell while Tokyo remains on holiday for Golden Week. The MSCI Asia Pacific ex-Japan stock index suffered a 1.4% decline as concerns grew over the potential for reprisal attacks. The yen strengthened to its strongest in more than a month against the dollar where its gains accelerated shortly after New York trading got underway. The yen rose lately to ¥80.70 per dollar.
Canadian dollar – After seven years of minority rule, Canada elected a majority for Stephen Harper’s Conservative party at Monday’s polls securing him a mandate to deliver corporate and personal income tax cuts and a reduction in spending. Dealers rejoiced in the decisive victory strengthening the local dollar to $1.0541 U.S. cents. Ahead of the March call for an election the Conservatives held 143 seats and post-vote will hold 166 as Canada determines the need for majority rule. But as the celebrations began, risk aversion took hold across global markets sending commodity prices lower as dealers took a dimmer view towards growth-sensitive areas. The greenback reversed earlier weakness sending the loonie scurrying for cover and down to $1.0458 U.S.
Aussie dollar – The Reserve Bank of Australia left interest rates alone at the May meeting saying that policy was its current “mildly restrictive” policy stance remained appropriate. Moreover the recent ascent of the local dollar was adding to the stresses for industries most exposed to trade. Governor Glenn Stevens warned that the currency’s strength might yet damage trade ahead. Dealers were not as much disappointed by the RBA’s failure to deliver further monetary tightening today as much as they were forced to further rein in predictions for rate increases in the months ahead. The odds of an October-time rate increase before today’s RBA meeting stood at 62% likelihood of a hike, but following the response the prospect is pretty much no greater than a coin toss. The Aussie was also pressured during European trading by weakening commodity prices, which helped send the unit lower to $1.0850 from Sunday evening’s record high at $1.1012 U.S. cents.
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.