Did investors misread the Fed?

British pound – The pound also fell against the dollar but gained against the euro as risk aversion accelerated midweek. The pound was earlier dinged by a dovish quarterly forecast from the Bank of England in which Governor King warned that there were limits to what the magic of monetary policy could achieve. Still, he predicted that a pick-up in global consumption would fix that beyond next year, but in the meantime the clear squeeze on incomes meant that the Bank needed to downgrade 2012 GDP from 2.5% to 2.0%. That still looks mightily ambitious given the pressure on household spending as near-term inflation heads towards 5% before turning down. The Bank now predicts that in the medium-term price pressures will fall to below the Bank’s policy target. The likely inaction at the central bank will ultimately weigh on the dollar as investors look to a measly growth outlook in the U.S. for assistance. And if interest rates are on hold for two years in Washington, you can bank on the same in the U.K. The dollar recently gained towards the strongest against the pound in two weeks at $1.6183.

Japanese yen –The safety valve of the yen remained a theme overnight with Finance Minster Noda dramatizing the likely impact of a strong currency on what otherwise looks like a health rebound after the earthquake. Mr. Noda again referred to that one-sided volatility in the direction of the yen and its consequences. The yen is at its strongest point of the session at ¥76.35 and within spitting distance of its March 17 peak at ¥76.25, which sparked G7 intervention. The Bank of Japan must be finding it tough going sitting out on the sidelines watching the world’s problems play out with such negative consequences for its own yen. This time tomorrow I expect to be explaining how many dollars the BOJ bought overnight.

Canadian dollar – Just how misplaced Tuesday’s risk-on orgy was is showing up in a reversal of the Canadian dollar as dealers recognize the fainter heartbeat emanating from its biggest customer. If low interest rates in the world’s largest economy haven’t done the trick after three years, what good will a further two years make? As loonie-investors mull that over they are quickly concluding that a retreat below parity for the local dollar might not be such a bad place after all. Having reached $1.0202 cents earlier the unit fell to buy just $1.0091 recently.

Aussie dollar – As the greenback rolled over and played dead on Tuesday as the FOMC growled, the Aussie rolled out the beach-blanket and relaxed in the sun’s rays. Today the story is a little different as a vicious selling spiral grips U.S. equity markets leading to risk-off trades and boosting the dollar. The Aussie also suffered on account of a decline in a Westpac confidence index, where consumers’ responses were the least optimistic since May 2009. The index accordingly fell by 3.5% to 89.6 and weighed on the Aussie dollar, which recently traded at $1.0266 cents.

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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