Foreign Exchange Insights
July 18, 2008
I take away four themes from this past week. First off, many economies, not just one, face a credible recession risk, but inflation is the big bad wolf. Britain, Spain, Japan, Ireland, Denmark and New Zealand are on the recession watch-list. That list once had only the United States, and many economists earlier declared that a U.S. recession had already already begun. Now they are unsure about such claims and whether a recession is inevitable. Despite downside risks to growth that have persisted for a whole year, the Fed, Bank of England, and Bank of Canada have stopped cutting rates, while other central banks, like those in Thailand and the Philippines this past week, keep ratcheting them up.
My second observation is that commodity currencies like the Canadian dollar (+1.3% as of Friday morning), the Aussie dollar (+0.7%) and the kiwi (+0.4%) rose against the U.S. currency despite a sharp drop in oil prices from a peak of $147.27 per barrel reached a week ago to $129.29 at Thursday’s close. More importantly, they rose against the Swissy, yen and euro, the three traditional hard currencies. This development underscores the counter-intuitive element of foreign exchange trading. Over short and multi-month periods of time, and especially during the summer, no financial market surpasses foreign exchange for the frequency with which it appears disconnected from fundamental economic and policy news. Many corporations have simply given up trying to forecast currency movements and incorporating such information into long-term investment and pricing plans.
Third, dollar/yen has lately been a more volatile relationship than EUR/USD. The former had a high-low range this past week of 107.09 – 103.79, equal to 3.2%. The width of that band is twice as wide as the $1.6038 to 1.5784 range of the euro. The euro’s stability can also be seen in the succession of early-morning New York quotes entered into my data base of $1.5907 on Friday, July 11, 1.5860 on July 14, 1.5968 on July 15, 1.5885 on July 16, 1.5845 on July 17 and 1.5835 today. The parallel sequence of yen quotes — 105.91 on the 11th, then 106.64, 104.77, 104.25, 105.75 and 106.65 — exhibits greater activity even if the end-point is not far from the starting level. The euro is a better barometer than the yen of overall dollar health and international sentiment toward the U.S. economy. The euro’s print of $1.6038 was a record peak. Although a breach of the psychological barrier $1.60 barrier failed again to hold, as occurred in April, the euro is staying close to all-time highs. By comparison, the yen is 25% weaker than its all-time dollar peak hit in April 1995. Increasing market chatter that Chinese officials are growing more uneasy about the faster rate of yuan appreciation could depress the yen in the period ahead, if the reports are borne out by a slower climb in the yuan.
The last development that caught my eye this past week was in fact the absence of a development. There have been opportunities in the past month like the G8 Hokkaido summit and Chairman Bernanke’s Congressional testimony this past Wednesday-Thursday to express greater concern about the dollar. It didn’t happen. So the tougher wording in support of the dollar found in the last communique of G7 finance ministers and central bankers so far lacks the bite to back up the bark. Amid a convergence of growth prospects with more economies at risk of recession and the United States perhaps avoiding such, the near future would seem to offer conditions in which joint currency market intervention might prove effective. If that is being planned, officials are doing a good job of keeping mum. Intervention tends to be most effective when done with an element of surprise. My sixth sense, however, is telling me that counting on intervention in 2008 will be an exercise in waiting for Godot. It’s unlikely to happen.
Next week’s data and even calendar starts very slowly. The British Rightmove house price index is the only item of half-decent merit on Monday, and Japanese markets will be closed then for Marine Day. On Tuesday in Japan arrives the all industry index and both supermarket and department store sales. Canadian retail sales and Italian consumer confidence will be released too, but none of these are market movers. There are several interesting items set for Wednesday, including an interest rate announcement from the Reserve Bank of New Zealand (whose cash rate likely will remain at a punishing 8.25%), minutes of the July Bank of England policy committee meeting, the Fed Beige book, Canadian consumer prices, Euroland industrial orders, French consumer spending, and, in the U.K., both BBA mortgage loans and CBI industrial trends. Euroland, German and French flash PMI scores for both manufacturing and services get released on Thursday, as do German, Italian and French business sentiment indices. That day, market participants also will be fed Japanese customs trade figures, British retail sales, and U.S. existing home sales and jobless claims. Friday’s calendar includes Japanese consumer prices and corporate service prices, a first glimpse of British GDP growth in 2Q08, Euroland monthly money and credit expansion, and U.S. new home sales, durable goods orders and the U. Michigan survey of consumer sentiment. There are fewer planned speaking opportunities by officials than in the week just ending. I suspect Barack Obama’s trip to Europe and the Mideast will likely make most of the headlines in that regard. Whereas the data focus this past week has been on prices, the emphasis next week is likely to shift attention to the weakness of growth now and in coming months. In theory, that should be a dollar positive. So should the euro’s failure to stay above $1.60. As always, currencies will take much momentum from any runs in commodity prices or equities.
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Very knowledgeable and useful analysis by this blogger. Do we know his name?
I am glad he mentions not only the G-8 countries but other players, such as Brazil, India, China, Thailand, the Philippines. These countries will become more important in the near future.