A clean bill of health for European banks hitched to a caravan of love for U.S. corporate earnings has caused a seismic shift in risk appetite in turn boosting the value of higher yielding assets. As risk aversion wanes so too is the value of the dollar as the euro regains its poise dragging commodity dollars back towards early spring highs. The sudden surge in the value of the euro along with the twin commodity plays of the Aussie and Canadian dollars exemplifies perfectly the challenge faced by technical analysis which claims that some of the best moves occur in overbought territory. Challenged by this fact brave new buyers are having to act swiftly in recognition of the sea-change in the fundamental picture.

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Euro - The euro surged in early New York trading to $1.3046 for its best performance since May 10 when the authorities announced a major plan of assistance for the European financial system. Since that intervention it lurched to its weakest point of $1.1876 from which point it has slowly recovered following strengthening fundamental data and the promise of a prod inside the balance sheet of financial institutions within the region. What has become increasingly evident during the last couple of months is that the pace of economic growth within the Eurozone has accelerated and left the pace in the U.S. looking rather slim. Adding to the positive tone today is a rise in the health of the German consumer according to a GfK survey. The August reading exceeded expectations while the current month's reading was revised higher. The data has been broadly recovering since it reached a low point following the collapse of Lehman Brothers two years ago.

U.S. Dollar - In an interview with Bloomberg news Philadelphia Fed Chairman Charles Plosser told reporters that the current wave of weaker U.S. data was not sufficient powerful in either direction to compel a strong view. Talks of new efforts to stimulate the economy are premature right now, he said. Investors seem to be slowly but surely warming to the view that the moderation in economic activity is little more than a soft patch and does not portend a deeper recession. This softening view is a blow for the dollar, which stands to gain from a risk aversion standpoint if the economy craters. Standing at the point of economic malaise, however, leaves the dollar vulnerable to the simple fact that other economies are outperforming at this point. The dollar index reached its weakest in 12 weeks falling to 81.85.

 

Canadian dollar - Investors threw off their shackles of restraint as they actively recognized the economic metamorphosis appearing before them. Growth outside the U.S. is doing fine, while growth within the U.S. isn't cratering - it's ameliorating. The appetite for commodities and by extension commodity dollars took a bold step forward on Tuesday lifting the Canadian dollar to its best level against the dollar in four weeks. The unit traded at 97.45 U.S. cents this morning. 

 

Aussie dollar - Investors were similarly the most optimistic on the Aussie unit since the European rescue package was announced in May hoisting it above key technical resistance at 90.00 U.S. cents. There is also growing hope that the RBA will soon be back in rate tightening mode and that Wednesday's second quarter inflation data will prod them back into action. The report is expected to indicate that the buoyancy of regional economies and the impact it's having on domestic economy is raising pressure on prices, which are predicted to have risen at the fastest pace in three quarters. The Aussie last traded at 90.60 cents.

Japanese yen -Japanese Finance Minister Noda welcomed the safe passage of eth European stress tests but failed to discuss the yen whose value has remained stubbornly high since the results. Today the dollar is trading at ¥87.56 while the yen also lost ground to the euro, which rose to a seven week peak at ¥114.12.

British pound - The pound is also threatening to breach the top of a two-month old trading range versus the Japanese yen where it buys ¥136.34 although against the dollar the British unit continues to fly high. The improved tone today was triggered by a rather welcome view of the British consumer where worries had surfaced that forthcoming tax increases and possible public sector layoffs accompanied by a severe bout of spending cuts would demolish spending patterns. Based upon what the CBI reported today, there's life in the old dog yet. The survey balances the number of retailers reporting higher sales against those reporting lower sales compared to the same month one year ago. The July reading of 34 was a far stronger balance of positive respondents than anyone had predicted and was the highest since April 2007. Meanwhile predictions for August strength indicate sales might be the strongest in at least six years. The pound's strength continued as it reached $1.5578 this morning. Against the euro it also proved the stronger partner rising to 83.71 pence.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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