By Andrew Wilkinson at IB
Although Treasury Secretary Tim Geithner failed to persuade fellow finance ministers around the world to adopt a system of targeting current account deficits, he persuaded them sufficiently to pledge avoidance of competitive currency devaluations. The market’s response today is to step-up purchases of riskier assets in the conclusion that a damaging trade war has been sidestepped. The dollar has come under further heavy selling pressure while the officials from Tokyo have the most reason to sit quietly on the sidelines huffing and puffing their discontent as the yen tries for a fresh record beyond its 1995 all-time high.
U.S. Dollar – The dollar index is lower by 0.6% but fighting back against the consensus view that the G20 pledge is unambiguously dollar-bearish. Investors appear to be wholly convinced that following agreement that Asian nations won’t resist currency appreciation the FOMC will now open the floodgates on further quantitative easing.
Aussie dollar – The Aussie reached 99.72 U.S. cents spurred by the appeal of higher yielding currencies and the apparent conclusion suggesting there will be protectionist measures to disrupt trade. The Aussie was also propelled higher following third quarter data showing a sharp acceleration of inflation at the producer level. For the quarter ending September prices paid to producers accelerated at a 1.3% pace, which was almost three times the market forecast and 1.0% above second quarter data.
British pound – The pound joined in the assault on the dollar although is more than half a cent lower than its earlier peak. Investors continue to panic over the only pressure valve left that might help stimulate the economy. The Cameron coalition has boxed itself in to a tight corner through the admittedly necessary spending cuts aimed at restoring fiscal balance by 2015. The impact on growth is likely to leave a dormant economy at best and investors continue to turn towards the Bank of England for assistance through more bond purchases. Data today showed an 18-month low in mortgage approvals while Rightmove Plc said that the majority of Britons expect house prices to edge lower ahead. The pound weakened per euro to 89.18 pence and currently buys $1.5719.
Japanese yen – The yen remains one of the bigger losers after the G20 pledge. Dollar weakness and a wave of buying of Asian currencies in the hopes they will find their true market-determined values sent the dollar down to ¥80.14 before it rebounded to ¥80.63. This is the weakest the dollar has been in the recent slump and makes the 1995 yen peak at ¥79.75 look almost like a done deal.
Euro – The euro hit $1.4059 earlier but has since recoiled to exactly $1.4000 as the dollar claws its way back into the game. Despite the broad-based dollar weakness the euro still hasn’t managed to really challenge the $1.4125 mark when ebullience last carried it up to its nine month peak.
Canadian dollar – The Canadian dollar burst through its highest in a week as risk appetite resumed, fed by rising commodity prices as the dollar eased. The loonie rallied to an intraday peak of 98.35 U.S. cents before paring gains to stand at 97.95 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.