Tuesday October 27, 2009

The backbone to the United States economy took a nasty jolt in the shape of slumping consumer confidence in October. The reading of 47.7 fell well short of an improvement on September's reading of 53.4. Investors reacted by selling currencies in favor of the U.S. dollar, which rose to a two-week high against the euro by breaching $1.47 for the first time since October 13. In all it's taken just 24 hours for the dollar to reclaim the two cent gain that speculators took two weeks to build. The euro currently buys $1.4808 while the pound has shaken off the dust and is now marginally back up against the dollar at $1.6328.

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The big question is whether today's slide in confidence at the retail level is enough to worry equity prices further while creating more fertile grounds for a fear-based dollar recovery. Government bond prices turned up on the report after declines yesterday tat saw the yield on the 10-year government benchmark leap above 3.5% for the first time in a month. The dollar hardly responded earlier in the session to the ongoing stability shown by nationwide housing prices in the S&P Case/ Shiller index.

The dollar was already rising overnight as Asian equity prices responded to a false dawn in U.S. equities to begin the week. A largely positive start was quickly eroded leaving Wall Street investors nursing significant losses as declining prices built momentum. The negative Asian tone saw the dollar retain a bid, as did the Japanese yen as investors factored in a more fearful tone to trading after the recent climb in stock market values.

The exception to trading on sentiment was evidenced by the performance of the Australian dollar, which responded with a rally in ending three negative sessions after a Chinese official stated that industrial production in his nation might surge 16% in the final quarter of the year. With China being Australia's biggest customer, at least in terms of mineral and raw material exports the Aussie unit rose and currently stands at 91.66 U.S. cents. A rise in confidence in the shape of an NAB business survey also boosted the currency.

The yen stole ground against the euro by rising to ¥136.40 as fear crept in, while against the dollar the yen increased to ¥92.06 per dollar.

The pound also lost ground against the yen declining to ¥150.23 but was higher against the dollar and euro at 90.76 pennies. An optimistic CBI distributive retail sales survey painted a picture of increased optimism. The net balance between the number of retailers indicating gains in annual sales as opposed to those reporting fewer was the highest since December 2007.

Bank of England monetary policymaker, Adam Posen made light of last week's lousy U.K. growth data in a speech on Monday. Many are focused on the fact that Britain appears to be missing out on recovery when economies everywhere else are rebounding. Mr. Posen noted that other coincidental evidence of British recovery is clear. Next week the BoE will meet to discuss whether to extend its asset purchase program. It's probably fair to say that the pound is braced for an extension of the asset program and that if the Bank avoids doing so, there is probably room for sterling to rally. Additional quantitative easing at this point should probably serve to send the pound down.

The Canadian dollar is rallying ahead of Bank of Canada governor Carney's appearance before lawmakers as he discusses monetary policy. Last week the central bank denounced the appreciation of its dollar and tried to impress the point that there were several policy options including intervention that could be made to stem the impact of harsher monetary conditions on manufacturers and exporters. The perils of being a commodity currency are once again evident today as the rising price of crude oil helps lift the Canadian dollar to 93.80 cents.

Andrew Wilkinson

Senior Market Analyst