WELCOME TO A STATE OF FLUX

Today’s FX View from IB:

The gains in the dollar inspired by the Fed’s unexpected discount rate move last week appear to have abated. Most players appear comprehend the accompanying message that the action is merely a technical adjustment. In that respect Governor Bernanke’s semi-annual appearance in front of Congress at this week’s Humphrey Hawkins testimony will be scrutinized for any details on the timing of more meaningful adjustments to monetary policy. Yet we can probably guarantee the continued appearance of the “extended period” phrase at this stage of proceedings from Mr. Bernanke, which might further calm the dollar bulls from trying to chew through the bit. Meanwhile in Europe the single currency received a boost from German press reports indicating a potential €25 billion payment to Greece from its Eurozone partners. Regardless of the outcome, broad sentiment continues to weigh heavily on the euro.

U.S. Dollar – Investors have tossed to the side any notion that U.S. interest rates are heading higher anytime soon. Friday’s non-inflationary consumer price report put paid to those expectations and helped reignite some element of risk appetite. Commodity prices have firmed and the price of crude oil is back to a five-week high with the April contract back above $80 per barrel this morning.

Aussie dollar – One of the beneficiaries of the less aggressive timetable for U.S. interest rate movements is the Aussie dollar. Investors were immediately shocked at the move in the discount rate and worried that the Australian yield premium would be eroded faster than was previously thought. However, the Aussie continues to push at key resistance just under 90 U.S. cents as investors are able to see that the domestic Reserve bank is far more likely to tighten at least once if not twice before the Fed even starts its official rate raising process. Investors continued to put pressure on sterling and the euro against the Aussie where the clinical fundamental factors clearly favor the Aussie given the growing likelihood that European monetary policy will remain indefinitely on hold.

Canadian dollar – The Canadian dollar continues to tempt funds away from the U.S. dollar as commodity prices grind ever-higher. Don’t forget the Canadian unit has a limited yield advantage over the U.S. dollar and its monetary policy is not only anchored to that of the greenback but also that the Bank of Canada has almost guaranteed no first half change in monetary policy without an inflation shock. And so the Canadian dollar is gaining ground against the U.S. unit as a stand alone alternative as real commodity demand plays its way through the exchange rate. Data last week showed a huge surge in the value of overseas investor holdings of domestic equities and bonds. Today the Canadian dollar buys 96.30 U.S. cents.

British pound – Sterling is a little lower against the dollar at $1.5461 to begin the week but has rebounded well from Friday’s $1.5350 weakness. Further narrowing in the projected lead in weekend political polls continues to suggest that stealing candy from the baby remains an uphill struggle for the challenging Conservative party in this summer’s forthcoming election. A victory without conviction has the potential to leave either major party incapable of swallowing the necessary fiscal medicine to deal with the legacy of financial crisis. The pound has strengthened a little per euro to 87.98 pence. On a brighter note for the pound, since there appear to be few these days, the Engineering Employers Federation noted that credit conditions among its members eased somewhat during the first several weeks of this year. Fewer members reported rising credit costs as debt financing stabilized.

Euro – There has been no further talk over German media reports that the nation was about to announce it would spearhead funds totaling as much as €25 billion to struggling member nation, Greece. It’s also far from clear whether Greece wants cash and has stated previously that it would rather solve its own problems and recognizes its own responsibilities as a member nation of the Eurozone. The euro is currently marginally lower at $1.3614 having topped out at $1.3650 in earlier trading.

Greek central bank Governor George Provopoulos threw his weight behind government efforts to streamline budget spending while also raising taxes. He’s also an ECB policy maker and noted that markets had gone too far in betting against the “weak links.” He also said “it’s clear that there is a certain degree of overshooting. Given the high degree of uncertainty in the markets, one should not expect that the situation will normalize overnight.”

Japanese yen – The yen strengthened against the dollar to ¥91.36 as investors rethought the Fed’s likely game plan and realized that some of last week’s dollar gains on account of the Fed’s action were over cooked.