Dollar at two-week peak on weaker global manufacturing

IB FX Brief

Thursday September 1, 2011

A further lackluster reading for U.S. initial jobless claims compounded dour European economic data and led to a risk-off environment to start the new trading month. The single European currency unit slipped up on weakness in second-quarter growth data while investors increasingly sense that the cash-hampered governments of the Eurozone are discouraging employment and consumption. A series of weakening purchasing managers’ reports confirmed that the global economic expansion is under the growing threat of a slowdown.

U.S. Dollar – Initial jobless claims through last weekend just about hit forecast at 409,000 with the previous weekly series revised a little higher. Most economists will take the number as good enough to prevent a recession from landing and find solace in the likelihood that employment gains will continue to keep the economy afloat. Later in the morning the ISM manufacturing report for August is expected to cross the divide between expansion into contraction territory. The July reading of 50.9 is forecast to fall to 48.5 marking the first dip in two years to the contraction zone. The dollar index rose to its highest reading in two weeks at 74.55 as risk aversion replaced a recent string of gains for equities. Those gains have been achieved on growing hopes for further Fed intervention. However, market onlookers are changing the shape of what they expect the Fed to deliver and rather than expanding their balance sheet, investors are sensing that the central bank might rejig the composition of its holdings in an effort to deliver borrowers with more attractive financing options.

Euro – The euro is feeling the side-effects of that subtle shift in thinking about further easing from the Fed but fell to a two-week low against the dollar on account of weaker domestic data. The Eurozone-wide August PMI manufacturing reading came in lower than predicted at 49.0 and remains in contraction territory for the second month. German manufacturers barely expanded with that nation’s PMI coming in at 50.9 from 52.0 in July. Second quarter GDP for the nation slipped to a 0.1% pace from 1.3% in the first three-months of the year. Trade remained buoyant with import growth of 3.7% stepping-up from a first-quarter pace of 1.7%. Domestic demand fell to a 0.4% pace from 1.1% while private consumption actually contracted in the report at a 0.7% pace after barely expanding in the first showing of the year. The euro traded to as low as $1.4264 as dealers concluded that the fiscal austerity measures adopted across the region are weighing on both employment and consumption.
 
Japanese yen – Vehicle sales for August were 25.5% lower than a year ago, although had little impact on the yen, which weakened against the dollar to ¥77.01 in New York trading.

British pound – Having spent some of the last month attracting buyers as an alternative to the single euro currency, the pound now finds itself being dragged down by the unit. That’s especially true as dealers pore over increasingly obvious signs of impending recession. An earlier consumer confidence report indicated deteriorating sentiment while the Nationwide’s house price report poured oil on the fire with home values declining by 0.6% on the prior month leaving them 0.4% lower than a year ago. The nation’s manufacturing sector shrank for a second month with its PMI reading of 49.0 falling against a July index reading of 49.4. The pound slipped briefly beneath $1.6200 before catching its breath while making gains per euro to 88.13 pence.

Aussie dollar – A rebound for Australian retail sales helped buoy the local dollar and unwound some expectations of an aggressive monetary easing from the central bank. Sales in the nation rose by 0.5% in July after dipping by 0.1% in June. A second-quarter reading of private capital expenditure also chugged along nicely at a 4.9% pace after a 7.7% rise in the first three months of the year. The Australian manufacturing sector remained mired in the contraction zone with the PMI reading of 43.3 a tick lower than the July reading. The Aussie dollar’s quiet ascent continued with the unit trading at $1.0712 U.S. cents.         

Canadian dollar – The Canadian dollar initially softened on weakening risk appetite as global manufacturing data softened. The unit reached its session low at $1.0212 U.S. cents before reversing track to buy $1.0253.

Andrew Wilkinson                                                                   
Senior Market Analyst                                                               ibanalyst@interactivebrokers.com