Risk trade back on but dollar finds support

IB FX Brief: Dollar flounders in calmer waters

Early exuberance seems to have washed away in the currency markets after stability resumed midweek. A revival for risk appetite appears half-hearted and an earlier drubbing for the dollar has fallen by the way side. Dollar-bashing was inspired by the decision to put the credit rating of the U.S. under review and built on selling pressure after Bernanke offered the prospect of more forms of monetary easing.

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U.S. Dollar – Hopes for a return to normal have put the dollar under pressure over the past 48 hours. The dollar has fared well since May when dealers could see an end in sight to the Fed’s policy of buying government bonds and had hoped that a predicted second-half recovery would keep them from doing more. Subsequent economic weakness and the added shadows cast by European debt clouds have confirmed that the role of further Fed policy action is not yet off the table. The dollar weakened for a second day after Moody’s Investor Service put the nation’s credit rating under review for the first time since 1995 on concerns that lawmakers could trigger default if they budget talks fail to extend the debt ceiling. The likelihood of the government losing the AAA-rating it has held since 1917 still remains a remote one given the political bargaining in Washington with President Obama mulling a weekend retreat with congressional leaders at Camp David according to media reports. The dollar index has found support during the European session and ahead of a retail sales report, which could confirm the mediocre health of the cash-strapped consumer.

Aussie dollar – The voracious return of risk appetite on Wednesday appears to be running into the proverbial wall of worry. Take some pressure off the euro, redirect it to the dollar and you have a rather unstable concoction that shifts investor sentiment 180-degrees. Yet every time a rally gets underway for riskier bets, investors suddenly realize that the world is a calmer place these days and one facing most of the same challenges but now with a tempered wind at its back. The Aussie dollar snapped back from almost a week of losses to challenge resistance at $1.0787 U.S. cents before heading back to an unchanged $1.0756 in New York. An earlier report showed the biggest slide in confidence between Australian consumers while a housing market report compiled by National Australia Bank today showed that a string of seven interest rate increases from the Reserve Bank has left homebuyers facing tight credit conditions and an unwillingness to buy. According to the report second-quarter home prices declined by 2%. Weakness in regional stock prices also undermined hopes for a sustained rebound in sentiment and provoked a dip in the Aussie to its session low so far at $1.0712.

Euro – The euro jumped to a four day high at $1.4259 after Italy was successful in auctioning debt and an issue which had dogged the currency earlier in the week. Fears over a spillover from Greece to Italy has soothed somewhat prompting a short-covering rally in the single currency. European stocks continue to flop about in the water and there seems a lack of conviction about a risk-on rally. The single currency rose to ¥112.07 against the Japanese unit.

Canadian dollar – The Canadian dollar traded both sides of unchanged ahead of U.S. retail sales data and with one or two U.S. corporations providing a fillip to stock market futures trading, dealers felt justified in testing a two-week high for the unit. The loonie traded recently in New York at $1.0430 U.S. cents.

Japanese yen – The Japanese yen spiked lower after a second day of jawboning by Finance Minister Noda who said that the yen’s persistently one-sided trend would, if it continued, present a problem. Dealers took his words to heart as a warning that the Bank of Japan might shortly be under orders to restrain the yen through currency intervention. The yen recently moved to its highest against the dollar since March and overnight traded as low as ¥78.49. Within hours of reaching that low the comments from Mr. Noda saw the yen weaken rapidly to the session high for the dollar at ¥79.55.

British pound – The pound is in a world of its own on Thursday and has rebounded strongly without apparent reason. The pound has recently spent five days trading below $1.6000 and reached its intraweek low at $1.5781 on Tuesday. However, without any economic data to drive it higher today the unit has surged to as high as $1.6194.

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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