Dollar rallies: Period

IB FX Brief: What you see is what you get – dollar rallies

Following along from a dour Wednesday when some key commodity prices slipped by their maximum daily limits, there were pockets of disappointment in Asian and European trading. The combination of weakness in European industrial data and a huge miss for Australian employment figures deepened investors’ disenchantment in the recovery. And to ice the cake China announced another half-point increase in its bankers' reserve requirements. The dollar was short of few reasons to build on a scintillating rally.

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U.S. Dollar – It remains too early to get excited about a change in the dollar’s overall fortunes and on an index basis the unit could trade to 77.25 without breaching a key line of resistance. But still the dollar appears to be taking its safe-haven role with renewed vigor as buyers put a different spin on the attitude at the Fed. Fiscal challenges aside, the dollar is increasingly seen as offering relative stability at a time when alternative governments face difficulty in maintaining the recovery thanks to external challenges. The Fed’s argument that commodity-induced inflation is merely transitory was at odds with the view of leading central banks. But the fickle nature of commodity trading has derailed yield-hungry ambitions across the currency world leaving a question mark above the rationale or at least the desire among central bankers to shift policy in order to address temporary price spikes. The ‘what-you-see-is-what-you-get’ (wysiwyg) world of the dollar is attracting a bigger crowd these days where vanishing yields have been replaced by safety. The dollar faces a round of challenging data on Thursday with retail sales and producer prices on the scorecard. The dollar index stands at 75.50 ahead of today’s reports with the dollar only weaker against the yen this morning.

British pound – The March industrial and manufacturing reports offered a reprieve to the Bank of England after its downbeat assessment for the British economy, at least in terms of dousing the flames it immediately sparked concerning interest rate increases. The pound surged in response to the warning that inflation would reach 5% this year. But as Wednesday wore on questions arose about the likely onset of monetary tightening in such a shaky environment. A daily gain that drove the pound to $1.6504 and to its highest in seven weeks against the euro quickly turned to a slump. The below consensus readings for industrial output and for manufacturing where a muted rebound built on a stagnant reading for February, only soured appetite for the pound further. The dollar rose sending the pound to $1.6250 while the euro buys 87.05 pence.

Euro – How quickly the euro has reversed its assault on $1.5000 is quite amazing. The challenge remains the plight of Greece with both paths to a solution looking equally hazardous. A debt restructuring would cripple its banking system and create a hole-in-the-head-type credit crunch. The alternative of additional financial assistance is likely to incur further the wrath of German taxpayers, amply demonstrated by a drubbing in recent state elections much to the chagrin of Chancellor Merkel. The resurface of peripheral woes has taken a severe toll on the single currency, which today reached its lowest versus the dollar since April 1 and traded as low as $1.4123. Industrial production for March equally painted a picture of a downbeat existence for the Eurozone after a string of expansion raising questions about the outlook.

Japanese yen – There’s no stealing the yen’s safety-banner either so it seems. Most Asian dollars weakened overnight as regional stocks continued to head lower and commodity demand weakened. The yen rose against the dollar sending the Japanese to ¥80.75 after it had lost ground to a powerful rally in the greenback overnight that lifted it to ¥81.32. The yen also appreciated against the euro gaining to ¥114.72 while it added to gains against the pound at ¥131.76.

Aussie dollar – The April employment report raised questions over the powerful forces of a high exchange rate, skyrocketing energy prices and a shift to a tighter fiscal stance. Traders attempted a second assault on last week’s lows for the Aussie prompted by weakness in commodity prices after employers unexpectedly pared jobs. Dealers were braced for a net gain in employment of 17,000 positions with a large degree of focus on jobs created by the massive mining boom in the states of Queensland and Western Australia. Employers predictably added 22,900 positions between these two states. But the net decline in nationwide employment of 22,100 positions shocked investors with employers in New South Wales and Victoria, home to Australia’s two largest cities, shedding 56,200 jobs. Sellers drove the Aussie to $1.0567 U.S. cents although it currently remains safe above last week’s $1.0538 low.

Canadian dollar – The Canadian dollar has displayed remarkable resilience to the distractions stemming from crippled commodity prices. In its favor the loonie doesn’t carry the mantle of being a high-yielder and traders manage to successfully anchor interest rate expectations from the Bank of Canada to match those of the Fed. Yet with more than half of Canadian export revenues generated by natural resources, it’s difficult for traders not to become embroiled in the collapse especially when the greenback is on such a tear. Today’s weakness in the loonie drove it to $1.0312 U.S. cents after it traded midweek to as high as $1.0487. The draw now appears to be towards last week’s capitulation point at $1.0288 cents should commodity sales mount further.

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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