Thursday September 3, 2009

Currency markets continued to exhibit tumultuous moves in response to ongoing neurosis within the Chinese stock market. Today, investors feel the warmer waters of the Shanghai composite, which rose 4.2% after comments appeared from Chinese officials aimed at promoting market stability. Earlier in the week, investors fled the icy waters for fear of measures aimed at preventing over heating. The declining need to protect against the risk of holding high-yielding assets saw both the dollar and yen lose favor today. A lukewarm reception to guarded optimism from ECB chief, Trichet's words on a boost to recovery prospects saw the euro recoil from earlier gains.


The Japanese yen lost out to most currencies. We doubt its post-election honeymoon is over so soon given the tremendous opportunity to implement economic change from the incoming DPJ party. Indeed one official comment overnight invited a stronger yen as a sign of Japanese prosperity. The euro rose to purchase ¥132.21 while the some profit taking in favor of the dollar saw it regain ground to ¥92.53 having earlier slipped to ¥91.95, its weakest level against the yen since July 13. Currently the pair is trading towards the upper extreme of a well-constructed downwards channeling highlighting perfectly the erosion of the dollar since ¥95.00 on August 24.

As the rising tide of optimism in Shanghai lifts stocks, Asian traders lost sight of the need for yen. Instead they bought those typically riskier assets of Australia and New Zealand as hopes for a recovery were put back onto the agenda. The Aussie this morning rose to its strongest point of the week and currently buys 83.86 U.S. cents buoyed also by a push towards $1,000 for the price of gold. Crude oil also rose on hopes for firming Chinese demand.

U.S. jobless claims reported Thursday showed a static reading of unemployment claims at 570,000, while continuing claims came in at 6.2 million and so slightly up on one week ago. That's a step in the same direction as opposed to the right one ahead of Friday's labor department report from which the official unemployment rate is expected to lift a smidgeon to a 9.5% rate. Canada will also report at the same time and is expected to show a declining pace of job losses with August expected to show 15,000 compared to 44,500 lost throughout July. Today the Canadian dollar rose to buy 90.66 U.S. cents.

The OECD also beefed up its G7 economic prospects yesterday and relaxed its fears over recession. The report was mixed and offered central bank and global governments the advice that, even though they need not implement exit strategies from much-needed monetary and fiscal policies, they should announce them soon. The report boosted its forecast for growth this year as it revised its contraction prediction from 4.1% to 3.7%. It boosted its outlook most for the German economy while revising down its estimate for British growth.

The euro felt a little benefit from the report perhaps, but the fact that the pound also rose against the dollar smears oil on the canvas somewhat. Historically the OECD has been a laggard and has been quite inaccurate as a market weather vane. The pound rose to $1.6337 after having made a poor start to the week.

The non-manufacturing ISM data showed the U.S. service sector a notch closer to expanding in August as it rose above forecast to 48.4. A reading below 50 nevertheless indicates contraction but on the heels of a 46 reading in July, one can clearly see the ongoing thawing in service activity. After the report the dollar rose to an intraday peak against the euro, having failed earlier to breach $1.4350, which is still a penny below the summer-high one month ago when stocks were at their best. The euro is currently at $1.4250.

ECB president, Jean-Claude Trichet was guardedly optimistic on his assessment of the Eurozone. Clearly things have improved and economists widely expected a lift in this and next year's growth rate. The increase of 2010 GDP out of the ECB from a contractionary 0.3% to a positive 0.2% rate of growth wasn't enough to instill fresh euro currency buying today.

The dollar index has suddenly turned positive on the session and stands at 78.53.