Tuesday August 3, 2010

Currency values against the dollar were attracted towards a series of key technical levels overnight as the U.S. dollar index weakened to a further six-month low, crashing to its 200-day moving average. As the yen strengthened to its highest since November 2009 the euro stretched to a six-month peak despite plenty of discouraged bears continuing to bash its worth. What few failed to connect during the hoopla surrounding last week's return of the S&P 500 index to its 200-day moving average was the linkage between equity prices and the euro as risk assets. While the stock market was first to arrive at its technical target, few even bothered to draw the same on the chart for the single currency choosing instead to write off the move towards $1.3000 as a short-covering response to the stress tests. Yet that six cent (and shrinking) distance to the key objective is suddenly set to become the market's latest fad as the euro tears down another barrier at $1.3250 this morning.


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U.S. Dollar - The dollar has suddenly and quite simply become outmoded. The market is no longer in love with the view that the euro is set to disappear overnight as core European founding members turn their backs on the single unit. And the recent marked downturn in U.S. data somehow seems to short-change the American authorities given their magnanimous stimulus efforts. Yet Fed Chairman Bernanke once again rolled out the carpet of ultra-easy monetary policy well beyond the clear horizon yesterday when he spoke of the underwhelming state of economic recovery. His words also served as a catalyst in driving down the shorter end of the yield curve with the two-year yield again searching for a new record low at 0.534%. The slippage in the dollar's yield serves to undermine dollar demand once again in favor of anything holding a greater cushion of its own.

Japanese yen -The yen is a curious 2010 winner, standing higher against all of its major partners as investors remain skeptical of global recovery. Today it once again reached another high for the year against the dollar by jumping to a high at ¥85.73. That's actually another nine-month high while the Finance Minister told politicians that the market should find its own level. It doesn't sound like currency intervention is a strong possibility at this stage of the game. The yen's strength does seem at odds with the current flexing of risk appetite. Data-wise, the volume of auto sales in Japan stood 15% higher than a year ago according to government figures released today. The yen strengthened to ¥113.55 per euro.

Aussie dollar - For the third straight month the Reserve Bank today announced an unchanged cash rate at 4.5%. There was nothing within the accompanying policy statement to indicate any medium-term change to what has now become a neutral policy. Data today showed that retail sales maintained a 0.2% pace of increase seen in May although the June report was only half as strong as expectations. A construction industry report showed building approvals unexpectedly fell by 3.3% at the same time while analysts had predicted a 2% gain. Dealers testing the resolve of the nascent bout of risk appetite ran into difficulties when the Aussie found support at 90.71 U.S. cents before it later sped higher to 91.35 cents.

Euro - Further disdain for the dollar enabled the euro to trade at its best price in six months and earlier reached $1.3261 against the greenback before easing back to $1.3221. What's spurring the euro's strength is the obvious combination that the local recovery is outpacing that in the U.S. while the current perception is that the Fed is on the cusp of announcing further bond purchases as a means to stimulate the economy. That's helping drive down wholesale dollar borrowing costs and widening the spread below those for euros.

Canadian dollar -Canadians return from a long weekend to find their local dollar strode a step closer to parity with the U.S. dollar on Monday as appetite for the greenback dropped away. The local dollar earlier eased to 97.42 U.S. cents before rising to an intraday peak at 97.73.

British pound -More highs for the British pound to $1.5969 this morning after government-owned Northern Rock Asset Management Plc turned a profit for the first time in two years. The news indicated a better outlook for the banking industry. The pound continues its ascent with $1.6000 a clear target as the six-month highs keep rolling in. The last time the pound traded at that price was the start of February having just completed a rounded-top formation that saw the pound trade above $1.7000 in August 2009. Today's rally comes despite a weaker reading from the construction industry whose PMI declined at a faster pace to 54.1 in July having reached 58.4 in June.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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