Bon Appetit!

Monday November 9, 2009

Today investors are gorging on anything other than the U.S. dollar as a new feast of fourth quarter risk appetite gets underway. It took perhaps an hour to get over Friday's sticker-shock in the shape of a 10.2% headline reading of unemployment before the dollar would lie back down. Over the weekend it took admission from the G20 that the world economy is not out of the woods yet, and a weekend report from the IMF noting that the dollar has moved closer to medium term equilibrium but remains on the strong side, to rally another episode of risk appetite. The dollar so far has fallen to a two-week low in terms of the broad-based dollar index and the euro has once again regained $1.50. It seems that it's becoming easier to convince investors that trading in their worn out dollars might be rewarded with incremental gains in riskier overseas assets.

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The Scottish-bound G20 summit revealed little desire to walk away from an existing economic approach aimed at reviving the world economy through moentary and fiscal stimulus. After the meeting, British Chancellor of the Exchequer, Alistair Darling said, We agreed to maintain support for the recovery until it is assured. And that seems to have shaken a few worrywarts who had been increasingly alarmed by cries to detail exit strategies combined with data suggesting a fault in the recovery. It would seem that post-G20 recovery is back on the agenda cosseted by those same cozy conditions that were implemented several quarters ago.

The dollar fell against all 16 major trading partners driving the dollar index down by more than 1% to commence the week. The euro is fighting hard to rally above $1.50 although it must be only a matter of time before it sustains a jump above to challenge the recent $1.5063 high. The Japanese yen is marginally higher after the IMF highlighted the dollar's rise as carry-trade victim of choice. The dollar today buys ¥89.90 yen.

The euro was also boosted by two reports, admittedly reporting data from September, but still showing stronger growth than analysts were prepared for in both cases. German export orders surprised with a 3.8% monthly pace of growth while industrial orders easily surpassed predictions of a 1.1% rise with a 2.7% monthly increase. In the light of investors swift return to emerging market stocks, the risk appetite trade is clearly showing alive today and that's once again pulling the stops out from beneath the dollar. The MSCI Emerging Markets index has risen 5.4% in the last four sessions and is fast-reversing the losses handed to it in the final days of October.

The pound is shining today and buys $1.6772 while it is a little easier per euro at 89.41. The Kraft bid for Cadbury's would involve currency demand for almost £10 billion at current exchange rates and while the British confectioner has advised its shareholders to vote against the proposed takeover, it does show that corporations are doing more than just thinking about overseas acquisitions.

The traditional risk currencies are sharply higher in Monday's trade. The Aussie dollar buys 93.00 U.S. cents, while the Canadian dollar has easily brushed off Friday's disappointing employment report and buys 94.62 U.S. cents. With job news often referred to as a lagging barometer of economic health, investors seem more willing to buy the Canadian dollar on increasing risk demand than sell it when data disappoints.