Written Commentary

The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Investors question sustainable euro weakness

Friday March 12, 2010

The dollar is under pressure to end the week after words from a powerful investment house jolted investors expecting further decimation of the single European currency into a spin by warning that the next 10 cents for the euro is more likely on the upside than the downside. An unexpected jump in retail sales has provided a lifeline to an ailing dollar on Friday morning, but in my mind the die has been cast in that the rationale for remaining short the euro has just become more perilous than ever.

03-12-2010 04:40 PM EST	Current Price	Put Open Int	Weekly Change in Put Open Int	Call Open Int	Weekly Change in Call Open Int	Put/Call Open Int Ratio	30-day Historical Vol (%)	Implied Volatility (%)
Euro	1.3770	25,549	65	14,670	371	1.7	11.0	9.4
Yen	90.4675	7,497	388	3,174	56	2.4	12.4	10.7
Pound	1.5185	15,762	3,545	5,658	2,074	2.8	12.0	10.8
Canada	0.9833	4,638	298	11,340	910	0.4	10.8	9.4
Aussie	0.9150	4,541	-7	24,426	169	0.2	13.9	10.7
Swiss	1.0580	2,128	-1	3,733	1,375	0.6	11.1	9.1

U.S. Dollar – Despite predictions for a February slide in U.S. retail sales, the out turn was a healthy 0.3% rise as electronics sales jumped. Ex-autos, sales rose 0.8% proving that winter blizzards and car recalls failed to dampen the spirits of consumers. A smaller than forecast decline in job losses last week may have also played a role, while one could equally argue that rising confidence among newly hired workers bodes well for the March employment report amid a spring thaw. We’ll also get the latest reading for consumer confidence later today from the University of Michigan in its sentiment survey, which is predicted to rise from 73.6 to 74.0.

The dollar index is lower after Goldman Sachs predicted that dollar strength is tomorrow’s story, but that its performance against the euro is more likely to result in a medium term revisit to $1.45 so long as it remains above $1.35. The dollar also weakened on viable rumors that President Obama was about to nominate San Francisco dove Janet Yellen as vice chairman at the Federal Reserve. She recently stated that if she could vote for negative rates, indeed she would.

Euro – Earlier the euro reached $1.3796 ahead of U.S. retail sales and has subsequently pulled back to $1.3754. It remains to be seen which line of argument is stronger: The premise that the euro-bashing has gone too far remains my favorite, while I still see rising yields as a story supportive of the dollar in the second half of the year rather than today. The euro was earlier supported by surprising strength in data from January released this morning indicating a far healthier picture for industrial production than previously believed. In itself data showing a 1.4% annual increase in production compared to a forecast decline of 1.6% has radically shaken the sleepy Eurozone bears.

British pound – The pound is also much firmer against the greenback although the reason is possibly more driven by abatement to conviction surrounding a strengthening dollar today. Yet two sterling bullish events have transpired and the pound stands at $1.5135 post retail sales data from the States. First of all, a new political opinion poll apparently indicates less likelihood of stalemate as voters are warming to the Conservatives line of thinking. Second, a survey from Acadametrics claims a 1.9% increase in British home prices for February. However, the report is at odds with just about every other piece of data including bank lending and spotty data received from increasingly thin housing markets and I’d have to conclude that this report is merely a convenient peg on which to hang today’s sterling performance. The euro today buys a near unchanged 90.80 pence.

Japanese yen – The dollar surged against the yen after the retail sales and reversed its earlier losses. The yen is fast becoming the world’s whipping boy once again and its Prime Minister Hatoyama recently reflected that weakness among Japanese employers and manufacturers hardly sits comfortably with the high value of the yen. Japanese Finance Minister Kan also commented to the diet that he was prepared to sell the domestic currency in the event that the yen moved sharply adding further pressure to exporters while reducing the cost to importers and pressuring domestic prices. Next week the Bank of Japan concludes a two-day meeting and is tipped to expand a ¥10 trillion fund used to provide loans to banks as a means to encourage customer lending. The dollar is pushing on ¥91 this morning while the euro made gains to ¥125.

Aussie dollar – The Aussie failed earlier to sustain a breach above an intra-week peak at 91.93 U.S. cents and dealers used the stronger than forecast retail sales data as a reason to bag profits on the Aussie, which subsequently eased to 91.65 cents.

Canadian dollar – The loonie took a step closer to parity this morning spurred by a 20,900 gain by employers in a February employment report. The rate of unemployment declined to 8.2% helping drive the Canadian currency to 98.48 at its zenith this morning. It has subsequently pared gains to stand at 98.29 cents. Today’s high marks the strongest reading for the Canadian unit since July 2008.

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Sentiment data offsets strong retail sales data – yields flat

Friday, March 12, 2010

What’s more important: A jump in retail sales data that you’d have bet the bank would decline amid February’s winter snowstorms, or the proposed appointment of a dove as number two at the Fed? With the dollar apparently weakening ahead of the report on rumors that San Francisco Fed President would be nominated as vice chairman to Ben Bernanke, investors began to wonder if ever short term interest rates will rise. Ms. Yellen is a firm proponent of a “lower for longer” approach to monetary policy and recently noted that if she could set negative rates in this climate she probably would.

As of: Fri, 12 Mar 2010 03:57 PM EST

Eurodollar futures - Eurodollar futures were already weaker ahead of today’s surprise 0.3% gain for store sales during the Super Bowl month of February. And so an incremental weakening is nothing to write home about. June treasury futures have rebounded from an earlier slip to an intraday low of 116-08 to 116-23 where the yield reads 3.71%. A weaker than expected reading for consumer confidence tipped stocks into the red for a while and helped reverse those treasury market losses.  

Australian rate futures – Aussie yields remain susceptible to revisions to views on the top of the rate cycle. Until recently investors predicted the top of the monetary cycle would be 5%. But a recent acceleration in Asian demand and domestic job growth for a nation set to achieve several years of above average growth – according to its central bankers - is causing analysts to reformulate options. 10-year notes fell in price earlier in the week in response to the firming labor market data but stemmed that decline overnight. The yield at the 10-year area of the curve rose one basis point to 5.66% today. Meanwhile three month bill prices traded on the soft side with yields edging one or two pips higher. The March 2011 future currently implies a three month cash rate of 5.56% at expiration. That’s the most pessimistic since mid-January. During the interim while risk aversion mounted implied yields had slipped to as low as 4.92% as investors discounted a more dovish RBA.

Canada’s 90-day BA’s – A 20,900 employment add for February created ongoing havoc for Canadian money rates on Friday as investors tried to second-guess how much longer the Bank of Canada might be able to maintain a conciliatory tone. It’s only three-months to mid-year at which point the BoC is no longer committed to maintaining a near zero interest rate policy. Bill prices shed a further five basis points across the strip while Canadian bond yields rose despite the rebound in U.S. notes. The 10-year yield in Toronto rose to 3.53% allowing the spread between the two to narrow to 21 basis points.

European short futures – European futures rebounded from earlier losses while German bund prices reversed piercing losses causing yields to spike above 3.20% following the shortfall in the reading of the University of Michigan sentiment report. June bunds reached 122.07 before rallying to 122.55 where yields sit at 3.19%.

British interest rate futures – Short sterling futures rose as did gilt futures where the June contract added 36 ticks on the day rising to 113.92. Yields declined to 4.12% after a torrid week. A poll suggests a lower impending likelihood of a minority government after a summer election.

Japan – Tokyo stocks rose forcing the 10-year yield higher to finish the week at 1.32%. The economy remains in poor shape and investors await the outcome of a Bank of Japan meeting next week when the central bank my well attempt to provide further monetary support by adding fresh funds into the banking system. In addition it may even attempt to weaken the yen, which is hampering domestic recovery at a time when the Asian region is starting to boom. Prime Minister Hatoyama said earlier on Friday, “At a time when Japan’s economy and industries aren’t necessarily strong, I don’t think this is being reflected by the strong yen. We need to take firm measures against such yen strength.”

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.