Today’s FX View from IB:
Things could have been worse for the Australian dollar when the Reserve Bank decided not to sanction what would have been four interest rate increases in as many months. Had it made that decision just hours earlier when risk aversion was still in vogue, the market might have punished the Aussie far more than it did today reflecting a view that efforts by China to slow its domestic economy had upstaged domestic policy decision making. Fortunately, the more upbeat start to the week predicated on continued strength in manufacturing surveys around the world, has provided a softer landing pad for the suddenly out of favor Australian dollar.
Aussie dollar – The Reserve Bank of Australia said it wanted to observe the impact on the economy of its three earlier adjustments to the short-term cash rates before acting further. By doing so the RBA acted against the grain, ignoring a fully priced yield curve almost hoping for a quarter point movement from the central bank.
The stage was set for a rate rise for February given the evident strength in consumer spending, rising employment and inflation and the rude health of its primary export market in China. But, by failing to follow the market’s expectations today, the RBA has perhaps increased the uncertainty surrounding the future path of the Aussie dollar. In the wake of the unchanged rate announcement stop-loss selling of the Aussie dollar was powerful sending it down from 89.25 U.S. cents to around 87.75 cents.
Given the still attractive yield cushion that the Aussie commands with rates now static at 3.75%, the game becomes one of timing. Clearly there was plenty of disappointment at today’s decision and financial pain became the driver of the exodus. How quickly investors will return remains to be seen. The market was convinced there was never a better case for higher rates than today and the RBA’s inaction does cloud the issue. However, it would take a material slowing in the Chinese economy to do more real damage to the Aussie. Yet for now, it’s lost its luster – until the next time.
U.S. dollar is once again a little lower this morning according to the weaker dollar index at 79.29. The fact that the equity market got itself back into forward gear after supportive anecdotal manufacturing evidence on Monday helps reduce the speculative safe haven appeal of the dollar. It’s static against the Japanese yen at ¥90.61 and losing out to a euro, where technical momentum is building against the dollar in the short term at least.
The big event that could upset the applecart today is the appearance before a Senate Banking Committee of White House advisor Paul Volcker in a defense of the administration’s recently announced plan to curb risk taking by large banks. When President Obama first addressed the issue it was badly received on Wall Street and led to sharp commodity price declines in the view that lower risk appetite would reduce the number of positions held, which would undermine many asset prices. Mr. Volcker aims to lay the groundwork for acceptance of the plan based upon the view that large banks should not be seen as too big to fail.
Japanese yen – The unit is unchanged to the dollar, but made strong earlier gains against both the pound at ¥144.47 and against the Australian dollar at ¥79.97. One euro today buys ¥126.44 as it makes marginal gains across the board.
Euro – The euro regained its poise for the second day against the dollar and currently buys $1.3948. Few can see an end to the omnipresent concerns over fiscal policies that have elevated the sticky position of Portugal into the headlines.
British pound – Last week investors pounced upon the pound at the hint that the Bank of England might this week arrive at the point of abandoning its bond purchase program marking the potential end to quantitative easing. This would be a currency positive signaling that the economy is strong enough to stand alone. However, after a sharp two-day slide for the pound at the end of last week, traders are more cautious about jumping in ahead of Thursday’s confirmation from the Bank of England. This morning sterling is a little weaker against the dollar at $1.5940 and it’s also given some ground back to the euro at 87.45 pence.
Weighing against the prospects for sterling at present is the absence of data confirming the survey evidence. Hauling the economy from the mire of recession is proving far more challenging than anywhere else around the world. Recent rebounds in second half GDP data have been far more robust elsewhere than in the United Kingdom.
Canadian dollar – A rebound in both commodity prices and activity within the neighboring United States has helped the Canadian dollar make recent gains. Today’s RBA decision to hold still on rates is likely adding to the appeal of the Canadian precisely because investors don’t have to see through the clouds of confusion masking the Aussie dollar. Unlike the Aussie, there is no yield cushion payable on the Canadian dollar, yet it benefits from real deal flow for its abundant mineral resources. The abatement of the U.S. dollar rally so far this week has also boosted the value of base and precious metals, which also buoys the Canadian. This morning the subtle flow towards the loonie continues to benefit from firming energy prices and it’s half a cent firmer to 94.50 U.S. cents.
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.