An earlier rally for the dollar came to a crashing pause after a dire reading of second quarter growth although an ugly downwards revision to first quarter growth was the real sentiment killer. The dollar had been surprisingly firm even after a political impasse was punctuated by a further pause as Republican leaders failed to rouse sufficient support to put a vote to the test. While uncertainty mounts for the dollar ahead of a Tuesday deadline, traders are more convinced that the debt-ceiling issue will be resolved at that time to at least some degree. There is, however, no such similar date for the euro beyond which dealers can express confidence. Today the euro is once again on a losing streak as investors check over their shoulders to see little more than smoke and mirrors resulting from the latest Brussels meeting.
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U.S. Dollar – A debt-ceiling limited to $14.3 trillion must be raised so that the U.S. government can service its debt obligations. Heading into the deadline investors are concerned at the prospect of a debt-default and a consequent downgrade. On Wednesday the towering budget deficit will still be there, but we all know deep down inside that politicians will have agreed on a sustainable means by which to pay its way. Turning sentiment on its head on Friday was a revision to first-quarter GDP from a healthy pace of 1.9% to just 0.4%. Second-quarter growth had been expected to slow a smidgeon to an annualized 1.8% pace, but in the event came in at 1.3%. So while the pace did expand there is no silver lining to take away from the data given the admission that the economy was practically dead in the water earlier. The dollar index traded to an earlier high at 74.50 but since the jaw-dropping GDP number came along the index has slumped into reverse at 74.11.
Euro – The euro is fast recovering in light of the latest batch of American data. Earlier the unit sank to $1.4231 despite a surge in German retail sales during June and despite an improvement in Eurozone consumer prices for July. Admittedly the unexpected dip to 2.5% in costs faced by shoppers relieves further pressure on the ECB to consider a third round of interest rate increases. Moody’s said it was putting Spain’s Aa2-rating under review pending a possible downgrade as the nation’s regional governments struggle to control wayward budget deficits. The warning sent shivers across the Eurozone as investors again realized that little has been strengthened other than the vocabulary buttressing the stability pact. The distraction of the U.S. growth report threw the euro a bone and hoisted it back to beyond breakeven at $1.4363.
Canadian dollar – If you think the greenback had a bad day, just take a look at the Canadian dollar, which tanked on a double-dose of bad news. Canada relies on U.S. for 70% of its exports and so the bad news on both first and second-quarter GDP caused a sharp intake of breath for the Canadian dollar. But it faced a fit of apoplexy when a report showed domestic GDP contracted during May. The economy was expected to rebound from an April-time standstill but in the event fell by 0.3% causing heavy selling of the unit, which remains close to a session low at $1.0412 U.S. cents after closing Thursday at $1.0506.
Japanese yen – Another day and yet another categorical government warning that the nation’s central bank stands ready and armed to defuse an explosive yen. The risk-off sentiment behind the trading on account of the twin perils of European and U.S. debt woes has left both Swiss and Japanese units the best safe haven alternative to the dollar. The yen blasted right through its March 17 peak against the dollar after news broke of the U.S. economy’s stall and reached a new high at ¥77.10. The yen also traded up to ¥110.39 against the euro.
Aussie dollar – The Aussie remains sharply lower although off its session low at $1.0911 U.S. cents after growth in the world’s largest economy disappointed. The unit rose to $1.0957 as the U.S. stock market opened but faced a difficult domestic session on account of weak data. A measure of housing prices ticked lower for a second month while the Reserve Bank said that private sector credit floundered in June after expanding in May.
British pound – The pound reversed losses that drove it to a six-day low at $1.6261 following a sharper slide in consumer confidence than was expected. A GfK report using five individual gauges fell by five points to minus 30 with the sharpest component fall occurring in the measure looking ahead by 12 months. The world changed for the pound after U.S. data offered a reprieve and it recently traded back in positive territory at $1.6383.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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