Thursday November 12, 2009

A late in the week boost for the U.S. dollar finds its basis in the shrouded optimism of words of Chinese Premier, Wen Jiabao. His words on a televised state television interview were reminiscent of just about any other global financial leader when he pointed out that global economic recovery would be a slow and bumpy process and noted the uneven nature of world recovery. Asian stocks retreated after his cautious tone and risk preference took a back seat leading to a marginally more appealing dollar. The dollar is up against its Japanese counterpart to ¥90.31 while one euro today buys fewer dollars at $1.4913.

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Key employment statistics released on Thursday should have provided reason enough to sell the dollar today, but clearly investors can't ramp up enough enthusiasm for the euro today. The decline in initial claims by 12,000 to 502,000 through last weekend was the lowest reading since January and provides the best indication to date that job additions are on the horizon. The fact that continuing claims continues to fall and that extended benefit claims also dropped is a heartening development. Next week's data should continue to indicate an improving labor market and we now expect to see readings come in beneath 500,000 through year end.

Technically, the initial claims data was fodder for dollar bears, yet something bigger is clearly pervading the currency markets today. Gold put in a further record high at above $1,123 per ounce but has since recoiled as the dollar adds to gains beneath $1.49 against the euro. Crude oil prices also slipped and the general fatigue for risk appetite is causing equity prices to wilt at the edges. And so there are no prizes for guessing that the Canadian dollar is also lower today and buys 94.94 U.S. cents.

Meanwhile its commodity sister, the Aussie dollar is also slightly weaker against the greenback at 92.81 U.S. cents. The decline comes despite the surprising leap in employment for October revealed in earlier data. Australian employers created 24,500 jobs last month despite predictions of a 10,000 job loss. However, the rate of unemployment ticked up by one-tenth of a basis point to 5.8%, taking the shine off the report a little. Still, investors increased their perspective on a December 1 rate rise out of the Reserve Bank when they next meet.

Expectations were stepped up to an 88% certainty that the RBA will endorse a third straight rate increase to 3.75% at that time. This monetary stance remains the big difference between the appeal of respective Canadian and Australian dollars. While both are set to stay in investor favor for their commodity exposure, actual yield differential is only assured to aid the Aussie through the middle of 2010, which is when the Bank of Canada has assured that monetary policy will remain on hold.

The pound continues to feel the back of governor, Mervyn King's hand after he appeared to endorse a weaker currency, which might redress economic imbalances and naturally address an ailing export sector. The pound is lower once again today at $1.6545.

The pound is actually firmer against the euro, which now appears to be taking quite a slug to the gut today. One euro buys 89.9 pennies. Earlier Eurozone data showed unexpected weakness in the form of only a modest 0.3% expansion in the September reading of industrial production. While the August data was revised higher, we can't help but think that the euro is suddenly losing some of its appeal as real signs of how its strength retards growth begin to filter through.

Andrew Wilkinson

Senior Market Analyst