Today’s FX view from IB:
The dollar continues to flex its muscles at the start of a new week, basking in the aftermath of last week’s robust GDP data. While it’s no surprise to learn that there was no emergency fix to the Eurozone’s fiscal troubles over the weekend, it was a surprise to learn that an interview carried in Britain’s Sunday Times with the head of the local financial services regulator, suggested that supervision of carry-trades should be looked into. That’s a new theme this week and one that’s looming over the Australian dollar today. And while there’s no yield advantage to be had from the Canadian dollar, it too is suffering as a commodity currency, underpinning its role as a risk appetite candidate.
U.S. dollar is mixed this morning with the dollar index marginally lower having left the launch pad last week. The euro has found its legs today, while the dollar is making gains against the pound and Australian dollar.
Japanese yen – There’s a lack of driving forces to shift the yen against the dollar today. The dollar currently buys ¥90.31 and is virtually unchanged after the weekend. The domestic stock market reversed course and failed to follow the closing direction of the U.S. benchmarks from Friday, which is helping inspire at least some minor sense of confidence that the market can start afresh at the beginning of a new month.
Euro – A strong reading for Eurozone PMI data provided modest support for the euro on Monday keeping it above $1.3910 after a poor finish last Friday. No one is expecting any lines of support for Greek, Portuguese or other nations as they struggle with their budget deficits. Investors will have to rely on time healing the situation and hope that what growth does return will provide an irreversible boost to national tax revenues if employment and consumption rise. In the meantime, the euro looks set to play second fiddle to the dollar. The only thing that may work in favor of the euro going forward is growth, which might conceal fiscal woes.
British pound – The pound continues to suffer from traders’ ability to push it down on negative news. When faced with positive news investors seem to find sterling less appealing. In today’s session, one might be forgiven for thinking that a jump to the highest reading for 15 years in data showing a sharp rebound in manufacturing might have sent the pound higher. But a paltry 0.1% gain for monthly house prices lead to an annualized decline in house values through December. The combination of this lack of upward momentum coupled with a slight decline in mortgage approvals for December continues to weigh on sentiment against the pound. A CIPS/Markit Economics manufacturing activity index rose to its highest since 1994 with a jump to 56.7 and confirming a healthy expansion in the sector.
The pound reacted negatively as investors chose to focus on the possible impact of further weakness in the housing sector and what that might mean for consumption later in 2010. The pound fell against the dollar to stand at $1.5903, while one euro today buys 87.50 British pennies.
Aussie dollar – According to market predictions, the Reserve Bank of Australia will likely bring short term interest rates to a nice round 4% when it announces its decision on Tuesday. And while that is likely to widen the yield spread further in favor of the Aussie dollar, investors are currently more concerned about the demand impact for Australian exports if China nudges interest rates higher. The Aussie declined against both the yen and the dollar today as risk aversion concerns remained on center stage ahead of the RBA’s decision. The Aussie buys 88.37 U.S. cents and ¥79.80.
Canadian dollar – The Canadian dollar is only just starting to warm to slightly firmer commodity prices. If regulators do start to put carry trades on trial, they’ll have a hard time putting the Canadian dollar in the witness box given that its interest rates remain almost identical to those of the U.S. Gold and oil prices are offering a modest amount of support as investors look for a reason to prefer moving away from the greenback 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.