Monday November 2, 2009

It's amazing the difference a weekend can make and once again as we situate ourselves this morning, it's as if nothing ever happened last week. At the least one couldn't really tell that equity markets came under severe stress and that broadening ranges jolted implied volatility into action. At the start of a busy week with the global focus on central bank decisions, the soother start has given dealers cause to soften their demand for dollars and yen and once again commodity dollars are back in demand.

/

The Australians will be the first to make a decision on whether more policy restriction is immediately warranted. According to treasurer, Wayne Swan, the economic outlook is improving and such comments coupled with gently rising commodity prices today have put a bid behind the local dollar. Currently the Aussie buys 90.26 U.S. cents. The Reserve Bank of Australia lifted rates by 25 basis points at its October meeting and it seems logical that they compound that with a similar measure. House prices in eight Australian cities rose at a 4.2% pace in the third quarter according to today's statistics.

The rise in the price of crude oil to start the week has also inspired investors to buy the Canadian dollar off a one-month low today. Currently the so-called loonie buys 92.68 U.S. cents.

On Wednesday the Federal Reserve Open Market Committee will probably not reveal a lot. Last week interest rate expectations were on the wane as investors grew fearful that the FOMC wouldn't be in much of a position anytime soon to raise interest rates. Eurodollar rate futures rallied, pushing down yields and reduced the potential for a rate rise before March to around one in three. The fear that the economic recovery had perhaps run aground in light of the deceptively strong GDP data is what spooked people most. The decline in consumer spending will be closely monitored for any changes going forward.

The two-day FOMC meeting is unlikely to result in any policy statement change at this point and as such the dollar is a little lower against the euro today at $1.4771. Against the Japanese yen the unit is slightly firmer at ¥90.16.

The pound is weaker to start the week. The Bank of England is unlikely to announce any change in official rates when it concludes its Monetary Policy Committee meeting on Thursday. However, fears have mounted within the space of recent days that the Bank will now expand beyond the recently concluded first phase of its asset purchase program. After disastrously insipid third quarter growth data in recent weeks, while this does look appealing it's hardly a done deal.

There is also a bearish resumption of negative discussion on the impact of European Union rules on state help given to financial institutions. Two renowned British banks, RBS and Lloyds Banking Group along with well-known mortgage lender, Northern Rock run the risk of falling foul of the rules. That may cause them to commit self-harm by carving off part of their business units in order to remain compliant. Companies receiving state-aid, which includes these companies, are inadvertently provided with an unfair advantage. Along with the potential for extending the asset purchase plan, this theme continues to ebb and flow and helps send the pound swooning like a maniac.

The pound is currently exhibiting extraordinary volatility making it appealing for all traders who aim to trade the swing. Investors successful at reading the likelihood of asset intervention are likely to find trading the pound pretty fruitful at present. At $1.6394 the pound remains lower against the dollar and is also weaker against a euro that presently purchases 90.28 British pennies.

Andrew Wilkinson

Senior Market Analyst