By Andrew Wilkinson at IB:
Tuesday’s revival in the fortunes of the dollar came to an abrupt standstill when the minutes from the FOMC meeting confirmed a willingness to act further to buy bonds in the open market to spur lending. And while the story was hardly new, the minutes also included discussion as to why the central bank felt a need to engineer higher consumer inflation expectations. Investors were quick to discount a further debasement of the value of the dollar and immediately put the currency back on the back foot.
U.S. Dollar – The dollar has consequently shed 2.25 cents per euro, which rose from $1.3775 to $1.4000 within 24-hours. The dollar index remains sickly at the midweek point and is 0.3% lower in early trading. The dollar had risen on Tuesday when it appeared that risk aversion, caused by what looked to be a further orchestrated move by China to curb growth, might be the order of the day. The revelation that the Fed might be prepared to bolster inflation expectations through future policy adjustments undermined the currency’s earlier gains and sent its index to a nine-month low.
Euro – It’s the European single currency that continues to pick up the dollar’s slack. On Tuesday ECB member Axel Weber warned that it would be less dangerous to exit from a loose monetary stance than to find out later it had been too lax for too long. His observation that the risks of a Eurozone recession were low reminded investors that the chance of further bond purchases in the Eurozone is diminishing. That view was buttressed after a positive revision to data for industrial production across the Eurozone in July, while fresh August data beat expectations of lower output and built further upon earlier gains in the summer. The month-on-month jump in industrial output of 1% means that annual output stands 7.9% higher than a year ago. The euro currently stands at $1.3969.
British pound – While Axel weber was tentatively suggesting that monetary policy should revert to neutral the same can’t be said of Bank of England policy maker David Miles. He warned of the dangers of a premature removal of monetary stimulus. However, with government departments in Britain scrambling to finalize precisely where the axe must fall over the next couple of years, the outlook for economic growth looks challenging to say the least. The recovery trajectory plateaued over the summer in the face of an austerity plan and today’s employment picture turned bleak. The September benefit claimant count confirmed the deterioration in the prior month sending the overall count to an eight-month high at 1.473 million. The turn in the cycle was further evidenced by a dip in the Nationwide Building Society’s consumer confidence index, which slid to its weakest in 18-months. Home prices are resuming a downturn interrupted by economic recovery a year ago, while uncertainty over the outlook is restraining consumers’ appetite to spend. The pound nevertheless continued to improve against the dollar possibly because further quantitative easing will be larger in scale than in the U.S. coupled with the fact that British inflation remains above target rather than below as is the U.S. case. The pound buys $1.5843 while it slipped to its weakest in five months per euro at 88.09 pence.
Japanese yen – Demand for higher-yielding assets resumed after the FOMC statement and helped remove some of the elevated demand for the safe haven of the Japanese yen. Asian stocks rose after Bank of Japan Governor Shirakawa said he’d research more on how to apply the recently announced ¥5 trillion fund to include the widest range of assets possible in order to expand the economy further. The dollar remains hemmed into a narrow range for now but is higher at ¥81.85 against the yen. The yen slipped against the euro to ¥114.24. Yen demand was also tempered after some bullish economic data. Machine tool orders for August unexpectedly rose and built upon a previous gain, rising 10.1% on the month to stand 24.1% higher compared to one year ago.
Aussie dollar – A downturn in a measure of consumer sentiment in September appears to be nothing more than a blip on the radar. The October reading for Westpac’s consumer confidence rose 3.3% to 117.0 to reinforce the health of economic recovery. The march of the Aussie unit continued spurred by healthy Japanese data, a decline in demand for the safety of the yen and a broad revival in risk appetite sufficient to keep the Aussie dollar close to its highest since exchange rate controls were abandoned in 1983. The unit today buys 98.81 U.S. cents.
Canadian dollar – The Canadian dollar remains buoyant thanks to soaring commodity prices and rising equity prices. At 99.51 U.S. cents this morning the loonie is fast-approaching a clash with parity against the greenback – a date rudely interrupted six-months ago by fears over global recovery. It took exactly 30 days for the Canadian dollar to hit a 2010 low of 93.00 cents having last reached parity on April 21. It’s taken five months to practically reverse that loss.
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.