A mid-morning report showing an unexpected reversion to economic contraction in the Chicago-area had the same impact on currency values today as the butterfly that flapped its wings in the Amazonian jungle. An earlier report showing a larger slowdown in the pace of GDP contraction had boosted the dollar and highlighted the appeal of higher-yield plays around the world. Chaos theory struck forex town as investors were thrown off the currency market rollercoaster before the dollar's decline regained traction.
The Chicago-area ISM index of factory activity was supposed to register an above-50 and so expansionary reading for September after a 50 reading last time around. However, the data failed to confirm expansion plans of manufacturers and slipped back into the contraction zone, reading 46.1. The dollar gained from $1.4625 ahead of the report to $1.4575 immediately after before resuming its daily slip. The dollar pared losses against the Canadian and Aussie dollars after the report. It's probably fair to say that this shock-report inflicted significant damage to several investors who were clearly left short of dollars and had to scramble to cover damaging losses.
Earlier in the day confirmation that the U.S. second quarter GDP report had suffered less of a contraction than thought earlier, served to warm investor appetite to a broader recovery around the world. The dollar had eased on the session as the third quarter comes to a close today and currently the dollar is set to weaken versus 14 of 16 major trading partners.
The 0.7% shrinkage in the economy on the quarter compares to earlier government flash estimates of minus 1% and means the economy shrank by 6.4% over one year ago. The boost to consumption via government auto and housing programs is clear in the data and the critical issue going forward is whether the economy is ready to stand alone without government plans. Hence the chaotic reaction to today's ISM number.
Within the data there were encouraging signs as business investment spending fell at half the reported pace of the first estimate, while government spending running at the highest pace in seven years has some way to run before it stops impacting consumption.
Still the rally for stock prices of the third quarter came to another critical juncture after the ISM reading. Currently losses of around 1% are apparent for the main indices eroding some of the 26% quarterly gains for financial share prices and 22% for industrial companies.
Other external influences conspired to weigh upon the dollar this morning.
The euro was firmer after an auction of 12-month money resulted in allocation of about €75 billion at a 1% rate. The size of bids tendered was about half what some analysts had predicted. The result adds to evidence that the state of credit markets has indeed eased and shows that confidence in a recovery and lesser counterparty risk means fewer banks find the need to show up at the auction and ask the central bank for a loan. On balance the event today means that very, very gradually the need for stimulus is diminishing and prompts thoughts of when monetary policy can be tightened. This weighed on the dollar earlier today.
The pound continues to see its fortunes revived. Today's GfK NOP index of sentiment saw its largest leap in 14 years and lifted the balance to minus 16. The pound is currently off its $1.6120 intraday peak and stands at $1.5971.
As we noted in earlier commentary, the Aussie dollar's interest rate outlook makes it an appealing play to investors. Another layer of positive news emerged today with a 0.9% gain in August retail sales compared to an expectation of 0.5%. The prior month's reading was negative. Investors continue to line the streets waiting to buy the Aussie's dip and currently the unit stands at 88.06 cents against the dollar making it close to its best level since August 2008.
The Canadian dollar seemed to advance on a sharper gain in an index of raw materials last month. A simultaneous flat reading of monthly GDP failed to dent the appeal of the commodity-linked unit. Earlier gains for the price of crude oil, which was up 1.9% and gold, which was 1% firmer, helped lift investor appetite. One Canadian dollar purchases 93.17 U.S. cents this morning.
As for today's news on the Japanese yen, Mr. Fujii is on record as stating that the government has no intention of raising the yen's movement (read strength) at a forthcoming G7 meeting. In their infinite wisdom, traders took his comments as a green light to buy the yen, which is currently trading at ¥98.58 per dollar. Against the euro the yen also advanced to ¥131 and ¥143.19 against the pound.