Tuesday October 20, 2009

With global stock market averages fuelled by the lead of an American corporate earnings recovery it is the euro currency that continues to take the credit as it is drawn towards a 14-month high at $1.50 against the dollar. Futile attention to the dollar's unruly decline drawn by various politicians and central bankers falls only on deaf ears in Washington, where it appears the authorities have every interest but no appetite for rescuing the dollar as yet.

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Earnings at Apple Inc. after the closing bell on Monday of $1.82 blew well past the predicted $1.43 average. Analysts expected just 5 cents per share at Caterpillar but were instead treated to 51 cents.

The rejuvenation of corporate America is being etched right in front of our very eyes and is probably a strong reason going forward why the dollar's demise will ultimately fade. That fact, however, is likely a story for when the Fed looks more likely to raise interest rates. For now, the dollar bulls have been silenced. Of the 41 S&P 500 index components that have reported earnings, 34 have beaten analysts' expectations and this is contributing to demand for higher yield the globe over. In turn investors are dumping the dollar.

The euro is currently trading at $1.4967 and touched $1.4994 in overnight trading - its first real assault at the big number. Traders are expecting that a push beyond there will create some violent response as stops are triggered and dealers initiate long positions on a technical breakdown for the dollar. In that sense the market is playing a potentially explosive game of Buckaroo, with companies trying to add more and more positive earnings reports on the saddle of an increasingly irate mule. We watch intensely to find out which report card will send Bucky over the edge!

The pound sterling recovered from earlier weakness inspired after an announcement from Doha Holdings, an arm of the powerful Qatar Investment Authority, when it said it would halve its holdings in major British lender, Barclays Bank. The push lower to sterling is possibly attributable to a knee-jerk response that overseas investors are once again losing faith in the British economy. The swoon didn't last and the pound has since recovered to $1.6445.

The commodity dollars are having an interesting day. The minutes from the RBA meeting at which rates were earlier raised this month were released. The tone of the members' comments did little to undo any expectation that the RBA was about to take its foot off the monetary brake. The minutes referred to not raising its policy stance at the time as possibly imprudent and that it ran the risk of future higher inflation. The futures market currently implies a one-in-three chance that before the end of the year the RBA will have grabbed back 1% in terms of interest rate tightening from its crisis point at 3%.

At one point overnight the Aussie reached above 93.12 U.S. cents as investors continued to seek solace in advancing equity markets. However, some profit taking set in and the unit is back to 92.74 this morning.

The profit taking continued after the Bank of Canada was firm in its treatment of currency strength, noting that advances in the Canadian dollar would at some point fully offset the momentum of the economic recovery since July. That has some liquidation of long positions today driving the unit down to 95.50 cents from 97.75 yesterday.

The problem for the Canadian authorities is that its only weapon at this point is to verbally threaten the market. Other nations are voicing opinions over the health of the dollar, pointing to the empty mantra of the United States treasury that it promotes a strong dollar. However, it's not doing much to instill that strength at this time. The ECB's Trichet can chant all he wants about excessive currency volatility and how the Americans have created the belief that the dollar should be strong, but he won't bring out the cavalry just yet.

Andrew Wilkinson

Senior Market Analyst