Wednesday Sept. 7, 2011

After a plunge in risk appetite on Tuesday when many investors baulked at stocks, favoring the safety of the dollar and even treasury notes at record lows. A fresh look midweek at affairs has investor optimism on the rebound with the dollar under a little pressure as all eyes turn to speeches Thursday from Bernanke and Obama.

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U.S. Dollar - Bernanke addresses a crowd in Minneapolis where he'll discuss the economy. Later on Wednesday the Fed's Beige Book will reveal further insight over the health of the central bank's 12 districts. That summary will be used as a basis for discussion at the Fed's forthcoming two-day policy meeting where hopes are slowly morphing to what's been coined as operation twist. Should this turn out to be the case, the lack of further balance sheet expansion will put the dollar in a better light with investors. For now the rally in global equities and commodities has the greenback on the defensive with its index lower by 0.5% at 75.61. Overnight the buzz over what President Obama might deliver in his speech to Congress on Thursday evening took further shape. The media today reports a stimulus package to be announced in the region of $300 billion.

Euro - The single currency advanced after a German report showed an unexpected surge in industrial output during July. Only yesterday did a weak factory orders report point to a slump in export orders as business confidence slumped. The single currency dipped below $1.4000 for a couple of hours Tuesday before finding support after the highest German court denied an assault on the nation's contribution to the regional stability fund. The court ruled against the need to change the constitution in order for the zone's largest nation to contribute funds to the program. As the dollar backed off on Wednesday the euro advanced to $1.4151 but has since lost a penny and trades at $1.4035.

Japanese yen - After a solid advance for the dollar following the Swiss National Bank's measures to stem the advance of the franc, the yen tested ¥77.00 per dollar, although the greenback remains relatively firm at ¥77.33. Overnight data from Tokyo showed an uptick in expectations for the economy on a six-month forward looking basis. The leading index compiled using July data advanced from 103.3 to 106.0. The coincident indicator of present conditions was just about unchanged at 109.0 after reading 109.3 in June.

British pound - It's surprising to see the pound holding up in light of ongoing weakness in the economic picture. The Halifax index of house prices plunged unexpectedly according to a midweek report. The index fell by 2.6% in August, compounding an identical move the month before. On a three-month basis compared to one year ago home values fell by 1.2%. Clearly the impact on consumption and confidence is likely to still filter through to an already insipid economy. The Chancellor in a speech last evening also reiterated that the fiscal austerity measures aimed at restoring public finances were in-part designed with the aim of being able to maintain interest rates lower for longer. That's a feather in the cap for Governor King who repeatedly has to write an open letter of explanation to Downing Street each time inflation exceeds forecast. The pound remains below $1.6000 and traded recently at $1.5967. The pound weakened per euro, which buys 88.22 pence.

Aussie dollar -Reserve Bank Governor Stevens delivered a speech in which he hinted that the central bank could afford to leave rates unchanged. Having such flexibility he said, was beneficial. However, when you really cut to the chase, the Governor said that in times of extreme market volatility and when the skies were falling, it was quite handy to be able to maintain steady settings. To my mind this was more a case of conveying that he was not in any mood to buckle under pressure to ease monetary policy rather than stating that rates weren't about to rise. A strong GDP report for the second quarter showed the Australian economy grew by 1.2% in the three months ending June, and so expanding at an annualized 1.4% pace. The Aussie advanced as global stocks rebound and was aided by a jump in bond yields with the currency gaining to $1.0617 U.S. cents.

Canadian dollar - The Canadian central bank left monetary policy on hold at 1% Wednesday adding that the need for tighter monetary policy was now diminished on account of the European sovereign debt crisis and the pace of the U.S. recovery. The unit rose versus the dollar to buy $1.0117 U.S. cents.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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