Today’s FX View:
At the Asian open the euro lost its way somewhat as a story grew in stature that European leaders would discuss the weakness in the dollar. As traders discounted the impotency of the group to stem weakness in someone else’s currency, the euro regained its footing and looks set to advance to $1.50 at some point this week. There was another strand of weakness that was accentuated when Philip Lowe from the Reserve Bank of Australia compounded the appeal of the Aussie dollar when he reiterated the earlier words of the governor, Glenn Stevens. Rising interest rates in Australia and a firmer domestic economy are fanning demand for the local currency.
The words from Mr. Lowe lay it bare for all to see when it comes to the job of the RBA. They are charged with controlling inflation and weighing up exactly how strong the domestic economy really is. And the longer the time the passes them by, the more they appear to take the view that the damage inflicted by the global slowdown seems to have less to do with them over time. In other words there is less mess turning up on Bondi beach.
As the RBA demonstrated at its recent meeting, it’s time to raise rates and the ongoing commentary in the aftermath is making forex traders think again about the degree to which the Australians might go to normalize policy. There is a view that rates can be just edged a little higher just to move away from an over easy stance. However, that view is continually challenged by the RBA who seem to go to great pains to underscore the premise that not only are rates abnormally low but with hindsight since the economy was possibly less devastated than thought at first sight, policy stimulus needs to be withdrawn and perhaps quickly.
The Australian yield curve is currently taking a great deal of strain. Three month cash reflects another half point from the RBA, while the December futures contract implies a further full one percentage point rise from the present 3.25% cash rate. The end 2010 contract implies rates close to 6%. We are not saying this situation can’t become more bearish, in fact it appears as though the panic has only just started and will only accelerate Aussie dollar gains if stronger data emerges.
At 92.04 U.S. cents this morning, the Aussie continues to advance although investors have not yet been able to force prices above Friday’s 92.71 high for this move.
The Canadian dollar – whose torso is made out of raw materials while its brain is made of crude oil – continues to feel the full benefits of increasing global risk appetite. With the price of crude hovering just below $80 a barrel, the nature of the relationship between Canada and commodity prices is all too clear and is reflected in the spot rate at 96.29 this morning. Admittedly the loonie is a little lower as we write as a bout of dollar buying across the board emerges.
The British pound lost a little of its late week head of steam after reports of an interview with the latest addition to the Monetary Policy Committee, Adam Posen, who apparently told London’s Sunday Times that he favors an extension of the asset purchase program. A Financial Times interview with an influential insider at the Bank of England inferred policy makers might adopt a wait and see approach. This bolstered the fortunes of sterling last week, while it pared some gains today to stand at $1.6307.
The dollar index remains below 76 on the trade weighted index at 75.79 although is slightly higher on the day. The dollar is trading slightly lower to the yen at ¥90.83 this morning.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.