Thursday FX View: Heightened Sensory Awareness

by: Interactive Brokers

An unexpected rise in the number of fired workers filing for jobless benefits created the latest example of the impulsive reaction by investors to granular data. After Wednesday’s crude oil inventory slide made a mockery of limping stock market performance, an Asian rebound overnight has once again been made to look premature. The dollar is once again holding its own despite cries from an ever-growing crowd expecting it to fall flat on its nose. The euro declined to $1.4218 after the Philly Fed reported regional manufacturing growth for July and although the Conference Board’s leading indicator indicated recovery the data fell marginally short of expectations.

It seems that more so than ever each trickle of data has even greater meaning attached to it at present. That’s probably due to the growing wariness over whether the patchwork quilt sewn together by government and central banks is sufficient to warm the consumer until artificial demand can be adequately replaced by genuine consumer demand. The current problem is that while stability is present, economies are operating with still rising unemployment, which refutes the premise that the consumer can come off the government drip.

Shanghai stocks were full of bluster overnight with investors taking a cue from the drop in U.S. oil inventories, which suggest that final demand is indeed firm. Because that drove the price of crude oil higher it lifted commodity prices undermining the dollar. Local stocks added 4.5% while Japan’s Nikkei 225 index rallied 1.7%. Rising commodity prices drove optimism surrounding the Australian dollar, which rose.

However, it was a dour start to the U.S. market that caused investors to sell both Aussie and Canadian dollars as jobless claims unexpectedly rose. The 576,000 reading helped push the 4-week average reading up by four-thousand to 570,000. Temporarily or not, the perspective is becoming such that July’s employment report depicting a sudden turning point for the labor market was nothing more than a fluke. Supporting that worry is the standstill in continuing claims at 6.24 million. The Aussie eased to 82.90 cents while the Canadian dollar was unchanged at 91.25 cents.

In Wednesday’s commentary we made reference to Jim Flaherty at the Canadian finance ministry and toyed with his earlier references to selling the local dollar to stymie its unwarranted advance. Overnight the Reserve Bank of Australia reported that it sold less of its own dollars throughout July compared to heavier amounts in the previous two months even though the Aussie strengthened even more. The Aussie has held up better throughout the Asian turmoil so far relative to the Canadian dollar.

In Britain, the government reported its largest budget deficit for the month of July since records were first kept in 1993. An £8 billion shortfall compares to a prediction of a nearly balanced budget, if you consider a £600 million shortfall nearly balanced. The data harmed the pound since investors are concerned now that the government will be forced to fund a larger deficit than the current £220 billion estimate.

The pound is off to $1.6484 against the dollar and was further stressed by the fact that, while in line with expectations, year-over-year retail sales growth of 0.4% for July isn’t as good as a June advance of 1.3%. The pound also fell against the euro, which today buys 86.41 pennies. Recovery, as feared, looks tepid.