Excitement as a New Currency Market Season Kicks Off
September 2, 2012
There is a rhythm to the currency market season. The first act ends at the U.S. Memorial Day holiday, and the third and final act commences on Labor Day. In between lies the summer, which can be quirky. This summer began with the euro seemingly poised to fall beneath its June 2010 low of $1.1878, but the common currency secured traction and bottomed at $1.2041 on July 24. For the summer currency season as a whole, the euro edged 0.5% higher on balance. Net dollar movements against the Swiss franc and Chinese yuan were similarly tiny. The change against sterling was marginally less than 1.5%, while dollar/yen fell only 1.7%.
In the summer season of 2012, hope that the euro would survive was centered around bold assurances from ECB Pdt Draghi, although he guaranteed no unconditional action, and evidence of dissension among ECB policymakers continued to be aired in public. The euro debt and banking crisis remains an object of immense uncertainty at this writing. Nevertheless, peripheral bond yields fell significantly, equity prices rose, and the euro recovered losses. A second factor that buoyed the euro was a growing focus on U.S. policy uncertainties, which are huge as well and quickly coming to the fore, as the presidential and congressional elections kick into high campaign gear.
The post-Labor Day currency trading trimester is often very active. For quite a few years, the dollar exhibited a seasonal bias toward weakness between Labor Day and yearend. The bias has been in remission more recently. The dollar’s 9.7% appreciation in this interval last year constituted the largest gain against the euro (D-mark) since 1992. That year was a time when Bundesbank rates were cranked up above 9.5% to contain inflation stemming from the unification of West and East Germany. The dollar also climbed sizably by 5.0% and 6.1% in the autumn seasons of 2008 and 2005. Its average autumn appreciation in 2011, 2008 and 2005 of 6.9% was almost three times greater than the average dollar drop against the euro in the autumns of 2006, 2007, 2009 and 2010. The dollar rose 3.0% against the yen in the autumn of 2011, but for the 32 years from 1980 through and including 2011, dollar/yen on average fell by 2.6%. Likewise, despite the dollar’s greater resilience versus the euro lately, it has posted an average drop in the autumn season of 2.1% against the mark and/or euro since 1976.
The global economy is currently experiencing unique challenges that may render those precedents meaningless. Europe is one epicenter of the conflict of ideas and visions, and America and China have critical roles to play as well. A series of momentous decisions by officials and voters will occur this fall. Their significance may not be clear immediately, so it is doubtful that the cloud of uncertainty hanging over investors for several years already is about to move away. In time, the months just ahead may collectively constitute a major watershed of human history, eclipsing the springs of 1933 and 1968 in the last century and maybe even ranking alongside the fall of Rome or the onset of the Renaissance.
The historical significance of the period ahead needn’t be matched in the currency marketplace either by earth-shaking volatility or record directional one-way cumulative swings. As noted, considerable uncertainty will persist through yearend. In addition, no area is performing especially well, and the choices to be made entail risks all over. It’s not the 1970s when stark inflation and current account imbalances separated the cherished hard currencies from the rest. High social tension could intensify, and households will be tested severely in searching for enough financial security to get by. Currencies have been stalemated in the absence of perceived contrasts between regions that are succeeding and others that are not. Yet another constraint will be the interference of governments such as Japan, Switzerland, and China that refuse to tolerate forex instability at this fragile economic juncture. Their activity affects all key currencies sometimes directly but otherwise indirectly.
To say that currencies have been locked in a stalemated phase is not to deny an occasionally volatile week,but merely that key relationships have tended to return to equilibrium after a shock rather than move increasingly away. The opening week of the autumn season is crammed with news-making events and data reports. These include the greatly awaited ECB press conference, other central bank meetings in Canada, Britain, and Australia, the release of August purchasing managers surveys, the U.S. Democratic National election, and the arrival of August U.S. Labor Department jobs figures.
So what’s a frustrated currency day trader to do? If the fundamentals and technicals surrounding the major currencies seemingly remain murky, one can always consider commodity-sensitive currencies. This group was the clearest winner of the summer season during which the greenback declined by 6.2%, 5.5%, and 4.3% against the Australian dollar, kiwi and loonie.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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