Today’s FX View from IB:
The British pound came under heavy selling pressure at the European opening on Monday as investors reacted to a weekend reminder that AAA credit ratings have to be earned. And with fiscal integrity on the chopping block as a result of the forthcoming election, the perceived risks to the loss of such status was a convenient excuse for traders to lop a cent off the value of sterling versus the dollar. Global equity prices are lower to start the week and there is an air of risk aversion about the market tone even before U.S. markets are open.
British pound – The pound is safe for now according to a weekend report from Moody’s Investor Services, but traders wasted no time rehashing the story using it as reason enough to bash the pound the unit one more time. It was a notable laggard against the dollar and quickly slumped by more than a cent to as low as $1.5020 after a Friday close at $1.5184. The pound has since bounced back to $1.5060.
Comments carried by one regional newspaper cited Bank of England policy-member Kate Barker as forewarning about a possible quarter of negative GDP growth. Perhaps this is the real shocking event that hurt the pound today. The revised fourth quarter data showed a 0.3% growth recently marking the official recovery from fallen fortunes throughout the recession. However, a semi-official warning of a worsening outlook comes out of the blue and is set against a backdrop of an election that might result in political weakness in which the ruling party might make little headway in reducing the deficit. The pound also fell against the euro to stand at 91.17 pence while the pound dropped to ¥136.55.
U.S. Dollar – The FOMC begins a two-day meeting on Tuesday with no one looking for any change in official rates. However, the policy statement will be closely examined to ensure the Fed hasn’t changed its subtle tone.
Euro – Earlier weakness saw the euro ease to $1.3701 as ministers from the EU met in Brussels on Monday to thrash out principles on which a framework to assist Green might be built. The euro appears to be suffering from another long wait at the end of which there is no news to report, either good or bad. In early trading the euro declined to $1.3711.
Japanese yen – The yen awaits the outcome of this week’s two-day meeting at the Bank of Japan with dealers anticipating a further degree of easing, however the Bank might manage it. The top bet is for an extension of the ¥10 trillion fund via which the central bank has so far granted liquidity to the banks in an effort to encourage them to lend.
The yen maintained its weaker bias on Monday as traders continued to favor the dollar, which has built on the momentum it gathered Friday. At ¥90.70 the dollar remains within spitting distance of Friday’s ¥91.08 high. Against the euro the yen remains unchanged at ¥124.50.
Aussie dollar – Weakness in Asian equity markets hampered the progress of the recent advance in the Australian dollar, which on Friday traded at a seven-week peak against the dollar. Monday’s less enthusiastic mood contrasts to any of the recent reports indicating strong growth among Australia’s trading partners and ahead of minutes from the recent RBA meeting at which members voted for a quarter point increase in interest rates. Currency traders will be looking for hints as to how much further the central bank feels rates should go. Ahead of the trading day in New York the Aussie is slightly lower at 91.31 U.S. cents.
Canadian dollar – The Canadian dollar has maintained Friday’s strength spurred by another firming in employment conditions and the tailwinds of strong retail sales growth in its major U.S. market. Since its propulsion to 98.48 U.S. cents in the aftermath of Friday’s data the Canadian unit has not fallen below 98.07 cents since. Currently it’s trading at 98.25.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.