Wednesday March 17, 2010

Currency traders have no shortage of fodder to feast on after the FOMC and BOJ policy initiatives continue to deliver a global policy framework conducive to riskier assets. The debate rages as to whether or not a regime of arguably permanently low interest rates is a currency negative or positive. The yen weakened after the Bank of Japan doubled the amount of its term lending facility while the dollar slipped as the Fed indicated a slight upwards tilt in what was formerly a flat-lining economy. Rising yields can only come after economic recovery has formed roots and the prospects ahead look better. Better seems to continually appear and then disappear from the horizon so it seems.


U.S. Dollar - By maintaining its same old tone in yesterday's policy statement, the Fed gave bulls hoping to pin the yield argument on the dollar little hope that this line of thought would ever become a reality. Perhaps most disappointing was the same desperate attitude towards employment as previously. Of course, without a recovery in the jobs market, there can be no sustainable economic growth. Ahead of yesterday's statement I held out hope that there may be evidence of a strong March reading in two weeks time when the latest data might prove employers all stepped up to the plate at the same time. The Fed's behind the scenes analysis scuppers that expectation.

The dollar index is this morning at its weakest in six weeks as investors unwind that yield argument. Meanwhile Wall Street stocks rose to a 17-month high as those conditions already in place were maintained. As the same pattern develops worldwide, investors put dollars to play in overseas markets and in other riskier assets.

British pound - A sizeable risk premium has been recently built into the pound on account that the prospects of a minority government would struggle to reduce the budget deficit, which is running at 12% of GDP. Preying on that concept is the additional weight of a moribund economy since, without growth, tax revenue is subdued and a devotion to spending by the government remains a necessity. And so you can imagine the relief rally taking place in sterling today as an unexpected drop in the number of unemployed helped restore some confidence. A growing economy has the impact of increasing tax revenues and crowding out that need for artificial government spending through genuine consumer spending. The pound surged against the dollar to stand at $1.5381 before paring gains to stand at $1.5325 after U.S. producer prices showed scant signs of rising prices. The euro declined by a half penny to buy 89.75 pence.

The number of jobless claimants fell by 32,300 during February helping to reduce the claimant count to 4.9% from 5%, while the internationally recognized ILO claimant count saw the rate stick at 7.8%. Jobless claims were due to rise by 6,000 and so today's stronger report was quite a positive shock for the pound.

Euro - The removal of Greece from Standard and Poor's downgrade watch list aided the euro earlier although the shine appears to have disappeared from the single currency lately. It now stands at $1.3761 having reached $1.3817 in overnight trading. Notable about the euro today is that it is the unit making hardest work of a weaker dollar. Most currencies have tended to accelerate to the upside, each with a legitimate rationale for doing so. But the euro is struggling even as worries over Greece continue to slip into the background.

Japanese yen - As expected the Bank of Japan added more funds to the system for a further three month period and maintained its official monetary policy stance at 0.1%. Two-year yields slipped to a four-year low of 0.14%. The bigger news, however, is that two policy makers voted against the move, which has given way to some disappointment this today that today's doubling in the size of its commitment to the banking system to ¥20 trillion ($221 billion) marks the start of the unwinding of quantitative easing. Further additional pressure from the government to help combat deflationary pressures is likely to be met with more of the same type of resistance as was voiced today by two of its members. And while Bank of Japan Governor Shirakawa noted that the economy is overshooting the central bank's central forecast, by bowing to political pressure to push additional funds into the system he has opened up what may become an irreconcilable schism within the Bank of Japan.

The yen lost ground across the board although less notably against the dollar at ¥90.52, while against a surging Aussie dollar it slid to ¥83.60 from ¥82.93. The pound added more than one yen to ¥138.75.


Aussie dollar - Weakness in the U.S. dollar helped the price of gold, which flows back into demand for the local dollar. Meanwhile that global policy framework of easy money naturally lends itself well to the Aussie dollar. Internally the RBA's rate-rising bias was bolstered by data showing a 15% increase in housing starts during February. The Aussie reached a two-month high against the dollar at 92.38 U.S. cents earlier.

Canadian dollar -The Canadian dollar continues to draw a crowd and few can refute the hypothesis that on current data flows, Canada will have higher interest rates than the U.S. by the end of this year. Parity remains the magnet drawing investors to push and push the loonie ever-higher. Today it reached 99.06 at its peak and stands at 98.85 U.S. cents.

Andrew Wilkinson