Today’s FX View from IB:
A fresh look at the world of finance after a weekend of reflection has apparently inspired investors to cast off much of the bearishness that left Wall Street in tatters at the close of last week. The buck has been passed across the global time zones and arrives a little lower in New York this morning as investors bid up stock market futures contracts in the hope that the recent panic is overdone. However, the respite in the surge of the dollar this morning appears to be just that and does not yet look like a reversal in the recent good fortunes for the dollar. There appears to be life in the old dog yet.
U.S. dollar – Several factors appear to have benefitted from a desperately needed weekend rest. It mattered little to investors last week that of the 62 companies that reported earnings last week, 46 beat their estimates. Last week was another re-run of those days when value is tossed out of the window. Rising fear in and of itself was supported by the potential for a sharp slowdown in global growth. As the weekend approached, concern grew that Fed chairman Ben Bernanke might not have sufficient political support as he seeks re-nomination to the post. However, Senators appear to have rallied round and his new term looks sealed. This has removed some of the stench surrounding the market this morning and benchmark futures are staring at a 1% gain out of the starting gate this morning.
With global equity prices managing to stumble slowly to their feet and prices of copper, gold and crude oil managing a rally too, the perceived need for the dollar is weaker today allowing for a decline in the value of the dollar index.
Japanese yen – Stories from unnamed sources referred to as “people with knowledge of the matter” appear to be influencing yen weakness today. The reports say that the Bank of Japan is growing increasingly prepared to grant emergency loans to its banking system and stands ready to raise the amount of government bonds it will purchase. The Bank of Japan is struggling to stay on task in safeguarding economic recovery and is hoping to do so by limiting currency strength. This policy, if accurate, would seem to be a reversion to a political policy of the previous government, which was aimed at laying the foundations for export-led success through a cheaper yen. The new government has had a rather confused start by endorsing currency strength if it reflected the rising health of the economy. But as that appeared to strangle anemic growth, the view needed some political restatement. The yen fell today after a string of seven straight gains against the euro where it stands at ¥127.82. Against the dollar the yen is lower at ¥90.24.
British pound – The pound has rebounded against dollar to $1.6146 and against the euro at 87.73 pence. Later in the week it is likely that data will show much needed fourth quarter expansion in economic activity in the GDP report that will confirm the country’s emergence from recession. Today a property broker predicted that British home values will continue to rise during the next 12 months.
Euro – ECB council member and Austrian central banker, Ewald Nowotny, in an interview with Britain’s Financial Times said that banks should not fear the ECB’s policy of gradually withdrawing liquidity measures aimed at resisting the effects of the financial crisis. Such a “steady hand approach” is necessary to exit the strategy but should not signal any shift in official monetary policy. The euro is higher against the dollar at $1.4165 today after Mr. Nowotny also noted that Western Europe’s export markets appeared to be improving and that this had positive impacts on eastern European economies pace of recovery.
Aussie dollar – Investors hopped back into Aussie dollars forcing a 1% gain against the Japanese yen and a 0.7% gain against the U.S. dollar as risk appetite improved. The Aussie today buys 90.58 U.S. cents. It weakened following data showing a larger than forecast fourth quarter decline in producer prices at a 0.4% pace, which annualizes at a 1.5% decline. The Reserve Bank of Australia convenes next week and will decide on whether to adjust further its monetary policy after three consecutive quarter point rate increases. Before then, a report will provide the latest reading on consumer prices, which are currently running at an annual 2% rate, which is the floor of the RBA’s 2-3% band of tolerance.
Canadian dollar – Just to prove the point that there is only a modest amount of risk appetite evident in early trading the Canadian dollar is struggling against the U.S. dollar today. Later this week a report will show that the Canadian economy grew by 0.3% in November and up slightly on the October reading. Despite higher commodity prices in early trading, which is generally supportive of the Canadian unit, the dollar is trading at a marginally lower 94.42 U.S. cents today.
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.