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.

Currencies in flux

Wednesday September 8, 2010

The burning question on investors’ minds following the accusation that the Eurozone banking stress tests were flawed was whether or not the immediate shuttering of risk appetite was the start of a bigger meltdown. In overnight currency trading the sensation is that the reaction was overly bearish. The Aussie has swept through the top of its range, while the British pound has spiked higher and the yen is on the wane. No one wants to say it but just perhaps the newspaper accusation that Europe’s banks understated their sovereign holdings is little more than a storm in a teacup.

09-08-2010 04:08 PM EDT	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	1.2718	27,468	544	17,635	1,607	1.6	10.3	11.2
Yen	83.9000	10,736	130	2,871	162	3.7	10.8	12.6
Pound	1.5468	9,437	99	3,674	21	2.6	9.2	10.1
Canada	0.9638	10,479	170	10,633	-66	1.0	10.8	11.2
Aussie	0.9168	9,743	58	21,575	-123	0.5	12.8	12.2
Swiss	1.0118	3,703	0	6,355	473	0.6	12.2	11.5

Aussie dollar – On the eve of what could be the sixth straight employment gain by Australian employers the domestic currency has rebounded from Tuesday’s selling pressure and has poked its head higher than Monday’s ceiling at 91.18 U.S. cents. Such optimism suggests that dealers are willing to argue against the prediction that the European financial crisis is about to take a turn for the worse. At the very least Aussie dollar buying suggests that the fallout from the Eurozone might be limited given any of the measures previously put into action by central bankers. There was also positive domestic data in the news as a report showed a 1.7% rise in the volume of home loans extended throughout July. A decline for June was also softened. The report indicates the ongoing health of the consumer and is supportive of a claim that the RBA should continue to reign in monetary policy. The central bank left policy on hold earlier this week noting that the implication of overseas events continues to restrain their activity.

Euro – The euro traded to its lowest point for September so far earlier when it reached $1.2659. Comments from ECB member Axel Weber warned against complacency when he said that it’s too soon to call an end to the crisis although he discounted a deflationary spiral adding that there would be no return to recession. The euro has since perked up and rose to $1.2720 before heading back below $1.2700. The single currency is also lower against the British pound where it buys 82.16 pence but has made a minor gain against the yen at ¥106.43.

Japanese yen – The yen is back to a near unchanged price of ¥83.80 per dollar after Japanese Finance Minister Noda once again sounded prepared to wheel out the currency cannons. Mr. Noda said that he was prepared to take bold action against the persistent strength of the yen, which must have created some ripples in Tokyo as the unit snapped back from a gain to as high as ¥83.62.

British pound – Something appears odd about the spike in the British pound today. The data released showing manufacturing output and industrial production grew were hardly out of kilter with what was expected. What was out of line was the unexpected monthly gain for home prices reported by the Halifax Building Society, when investors were expecting a loss. That would have kept the story in line with what the Nationwide reported last week. Bears have been pounding the currency lower recently for fear that a recovery fast appearing to lose steam would crash headlong into spending cuts coming into play as a result of an austere British budget. The pound came very close to hitting $1.5500 having recovered from its lowest intraday point at $1.5297 on Tuesday. The movement suggests plenty of short-covering going on. Elsewhere mobile operator Vodaphone disposed of a $6.6 billion stake in China Mobile, which may have sparked a one-off sterling purchase at a point when the market was already short.

U.S. Dollar – The Fed releases its Beige Book later this afternoon and will provide its latest snapshot of health across the Fed’s 12 districts. Heading into the report the market seems braced for signs of a slowdown despite the unexpectedly positive surprise last week. Employers created 71,000 new positions during August and almost twice the expected pace. This morning the dollar is weaker against a basket of its major trading partners at 82.75. Investors appear undecided either way over a risk recovery this morning. The dollar’s earlier gain versus the yen would seem to indicate confidence in the risk climate, which also underpins a positive performance for equity index futures. However, the riskier currencies are not making it stick supporting a view that recovering risk appetite is likely to be short-lived.

Canadian dollar – The Canadian dollar is practically unchanged at 95.30 U.S. cents having reached 95.50 cents earlier this morning. The slide in crude oil prices accompanied by a lunge lower in global equities was enough to cap optimism over the Canadian unit. It appeared late last week that the Canadian unit might see a speedier recovery following the U.S. employment report.

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.

Canadian rate jolt sends shudders across global bonds

Wednesday September 8, 2010

Bonds have come back off the boil as investors try to figure out whether or not the European banking system might weigh any further on the global recovery following a recent poke at its methodology. Yields slumped on the news that Europe’s bankers might not have fully reported government debt on its books but as the shock wears off it seems that investors might be willing to return to business as usual. The lack of transparency in the reporting, even if were true, fails to answer the obvious question of whether or not the latest news increases the likelihood of a government default. It is hard to say at this point, however, that markets have brushed aside the report. However, firm action from the Bank of Canada quickly soured sentiment mid-morning reminding bond traders that recovery is out there – somewhere.

Canadian bills - Canadian bill traders face the toughest of times in reading the market’s tea loves at present. Today they sold bill futures after the central bank hoisted interest rate jolt. The Bank of Canada raised rates by a quarter point but appeared to cap further movements by admitting to a slower pace of growth on account of the uncertainty facing the U.S. economy. Further moves, it said, “would need to be carefully considered.” 90-day bill prices plunged around seven basis points this morning with the front December contract slipping most. The three-month contract shed 12 basis points lifting the implied yield to 1.27% compared to today’s official 1.00% setting for short rates.

European bond markets - Fears that gripped European bond markets on Tuesday haven’t quite passed yet, although as U.S. equity markets reopen today there is now some notable selling across government safe havens. December German bunds have completely reversed course with the contract printing a session low of 131.30 for a 40 tick loss on the day having earlier traded higher to 132.14. The yield on the 10-year benchmark has now risen to 2.28%. One press source reports light buying of paper issued by Portugal, Ireland and Greece by various European central banks. At the same time Portugal auctioned some three and 11-year debt today. Nearly twice as many bidders than needed showed up to take advantage of a 50 basis point increase in yields compared to the previous auction in June. The bid-to-cover ratio was still lower than at the time of that last auction. Bund prices had earlier responded to a shortfall in German industrial production in July. Market forecasters had expected a gain of 1.0% but were let down by a meager 0.1% gain.

British gilts - Following the change in official Canadian rates the British debt market also gave up gains. The December gilt contract, which earlier peaked at 124.76, gave up an entire point to 123.71 where yields surged to 2.95%. Fixed income failed to respond to in-line manufacturing data reports suggesting the recovery was on track. Short sterling prices have subsequently given up five basis points across the curve.

Eurodollar futures – Treasury notes have given up early morning gains with the December contract shedding nine ticks to a session low at 124-17 where the 10-year yield stands at 2.63%. Some optimism over an extension of the latest rally for bonds is waning independently. In other words steady stock market futures are not the cause of a bond rethink today. Later in the session the Fed releases the Beige Book survey of its 12 regional members. This report will shed light on the pace of the moderate recovery with investors braced for a lack of traction in the recovery process. Any pick-up in the pace of hiring intentions coincident with Friday’s bullish employment report could hurt the feelings of the bond market today. Eurodollar futures are a little softer overnight with the strip rising by four basis points in implied yield terms.

Japanese bonds - A slide of 2.2% in the Nikkei 225 stock index overnight and a rise to a 15-year high for the value of the yen against the U.S. dollar helped maintain downwards pressure on Japanese yields. The five-year yield recoiled from an eight-week peak and dropped by four basis points to 0.29%. The December 10-year JGB futures contract gained 22 ticks to stand at 141.57 where the yield dipped to 1.12%.

Australian bills – Aussie 10-year yields were unchanged as investors watched regional stock prices melt down. On the other hand a strong report indicating heavy loan demand for housing counterbalanced equity sales, creating equilibrium for bond prices. The 10-year government yield is unchanged at 4.863%. Meanwhile 90-day bill prices were swept lower by the report with implied yields gaining by four basis points.

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.

ETFs Brief

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

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.