Fed bets off, risk bets on!

It made sense to hold fire on sending out this morning’s report until after the U.S. employment data was filed. Ahead of the data the dollar was in buoyant mood after Federal regulators warned banks to protect themselves from a rising interest rate environment. Regulators warned banks to protect their books and even raise capital in the event the Fed changes its stance. Currency traders favoring the dollar on rising yield expectations took this as support for their view that short dated interest rate increases are coming sooner rather than later. In earlier trade the euro fell to $1.4265. After the data the dollar took a turn for the worst as interest rate markets poured scorn on the view that the Fed will firm rates anytime soon. Yet demand outside of the United States helped spur another round of risk appetite sending the greenback lower across the board.

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U.S. dollar – Traders were quick to abandon the dollar after an 85,000 payroll decline for December. The fact that revised data showed that employers added 4,000 jobs during November was lost within the disappointment following today’s number. The rate of unemployment remained steady at 10%. The dollar fell because investors now see far less likelihood that the Fed will act upon rates. The euro rose by a full penny after the data to create resistance later in the day at $1.4370. You just have to look at the move in rate futures, which swung by around 10 basis points over the data as traders priced out even deferred interest rate increases.

The dollar dropped like a stone against the Japanese yen as suddenly the pair were put back on a level pegging.  Anyone wanting to take advantage of the low borrowing cost of the dollar, but has been too fretful about the possibility tha the Fed might raise rates soon can breathe a little easier today. The dollar therefore slumped to ¥92.67 losing more than one yen in the space of just a few hours.

Canadian dollar – Ongoing bullishness towards the Canadian dollar drove it as high as 97.16 Thursday, its highest reading since October 20. Following a weaker than hoped for labor market report earlier this morning the loonie has fallen to 96.50. Although the rate of unemployment remained at 8.5% the economy shed a net 2,600 positions rather than the anticipated creation of 20,000 jobs. Today’s U.S. data report seems to have eclipsed the fortunes of the Canadian dollar. The double-blow of labor disappointment today leaves investors more sanguine about overall American demand, which of course impacts the health of the Canadian economy. The loonie is only now momving slowly higher back to 96.88 U.S. cents as the trend towards dollar weakness firms.

Japanese yen –Some back tracking by Naoto Kan, the new Japanese Finance Minister helped detract from dealer appetite for dollars over yen. Having admitted that he favored a strong yen the Finance Minister today noted that it should be for the market to set an appropriate level. The yen is consequently flat at ¥93.40.

Aussie dollar – The Aussie remained near multi-month highs against various currencies having built a head of steam earlier in the week. The growing body of evidence that the global economy will provide support for commodity demand directly impacts resource-rich Australian. The rude health of its own economy was exemplified earlier this week when a strong retail sales report sent the Aussie higher on the combination of rising interest rate expectations and resource demand. Recent Chinese demand for major Australian exports of iron ore and coal has seen prices of those materials surge, underpinning the value of the local dollar. Heading into the key U.S. report today, the Aussie was trading lower at 91.45 U.S. cents.  The Aussie moved like a shooting star after the data to stand at 92.08 U.S. cents and so reversed the intraday sentiment. The shift of emphasis firmly away from any change out of the Fed leaves the Aussie with blistering demand for its commodities looking a better proposition.

Euro – The rate of unemployment across the Eurozone is now at an 11-year high, that’s the year the ‘zone prepared for the imminent launch of the single currency euro and was marked by a period of austere public finances. A decade on, unemployment and a broad deterioration in public finances thanks to supporting a slump in private consumption has public deficits busting at the seams. While today’s date shows a 10% rate of unemployment for November, it’s likely that activity since has improved. However, the fact remains that the ECB is possibly not yet anywhere near tightening rates and the euro fell to $1.4265 against the dollar ahead of today’s date. After today’s data the euro recovered to above $1.4400.

British pound – The pound was largely isolated in posting a gain against the dollar earlier this morning. While the cloud of ongoing investor concerns lingers over sterling’s head, bearish investors were forced into a rethink earlier today following a poll that showed a lead for the opposition Conservative party large enough to hand it sufficient control in the event of an election victory that would probably permit decisive fiscal policy. High on the list of hindrances for the pound is a hung parliament leaving a lame government unable to steer public finances in a positive direction. The pound was half a cent higher at $1.5985 earlier before being ignited by the weaker U.S. data. The pound was last trading at $1.6085.

Andrew Wilkinson
Senior Market Analyst
interactivebrokers.com