Weekly Foreign Exchange Insights: March 13th

March 13, 2009

The currency markets will be affected next week by the ebb and flow of risk aversion, actual and expected intervention, the approaching end of Japan’s fiscal year, and oil price developments.

The yen, dollar, and Swiss franc have been bid higher by intermittent waves of risk aversion.  At times like this past week when optimism has brightened faintly, those currencies have given back ground.  Risk aversion has been the norm more often than not, however, and has been fed by a diet of very bad data trends.

  • U.S. jobs fell 646K per month over the past four reported months.  When scaled up to the size of the U.S. labor force, Canadian jobs fell 584K per month during the same period.
  • German industrial output and orders plunged at annualized rates of 38.5% and 60.2%, respectively, over the last five reported months.
  • An upwardly revised run-up in Japanese inventories last quarter suggests that GDP will drop more sharply this quarter than the 12.1% annualized pace in 4Q.  Japan’s inventory-to-shipments ratio soared 11.9% in January.
  • German exports plunged 55% at an annualized rate during the three months to January.
  • Japanese exports plummeted by a sharper 84.5% in the four months to January at an annualized rate.
  • British exports outside of the EU region fell 15.9% between December and January.
  • Foreign orders for Japanese machinery tumbled 49% in January and by 71% from a year earlier.
  • Turkish exports fell 35% in the year to February, and South Korean exports fell 25.6% on-year in January-February.
  • Chinese exports, which had risen 19.2% in the year to October 2008, swung to an on-year drop of 25.7% in February, five times steeper than assumed.

Profound economic weakness has hit all corners of the world economy, and globalization is magnifying the very negative momentum.  But markets are forward-looking.  Officials are unveiling a steady stream of measures to stabilize financial systems and fight the deflationary recession.  At times, investors are relieved by what looks to be an impressive policy response.  However, the general pattern has been for such initial euphoria to fade amid the drumbeat of poor economic reports and more sober reassessments of policy content, timing and magnitude.  Extreme uncertainty about efforts to fix banks has been associated with very wide swings in views about the viability of financial institutions, and whether nationalization will be a necessary condition for repairing what’s broken. Last week’s fillip to confidence was triggered by word that Citigroup made a profit in January-February and by better-than-expected U.S. retail sales, but that hardly outweighs the volume of bad news in the world economy.  Has all future bad news been discounted?  Nobody can be confident of that.

So far, pessimism has been the prudent way to approach these markets.  Currency markets will continue to gauge risk aversion by stock market performance.  The DOW is 9% above its Monday close at this writing.  It’s been a really long time since equities recorded consecutive solid weekly gains.  In addition to reported economic data, currency market participants will pay very close attention next week the preliminary G-20 finance ministers’ meeting in Britain today and tomorrow for any concrete actions or signs of greater cohesion in fiscal spending plans.  So far, policymakers have spoken in broad generalities, avoiding details but conveying enough information to suggest that the major players are not on the same page.

Intervention by the Swiss National Bank was accompanied by bold verbal guidance and caught markets by surprise.  At 14:30 GMT this morning, the Swissy was trading 2.3% lower for the week against the dollar and, more importantly, down by 4.3% against the euro, which was the object of the change in Swiss currency policy.  Despite many instances of successful intervention under the right circumstances and applied with tactical surprise but strategic consistency and persistence, quite a few market observers and traders hold the view that this policy tool invariably proves useless and expensive.  We’ll see, but my bet is that the Swiss venture has an enduring effect.  For one thing, market convictions on currency trends either in the short- or long-run do not appear very strong.

A bigger issue is whether Swiss intervention proves contagious.  Japanese officials have voiced great concern about the rising yen and now see how such has hammered their exports and overall economy.  It will be interesting if G-20 finance ministers reiterate their pledge to avoid competitive devaluations and, if so, how firmly the promise is stated.

Every March, many analysts write often about the distortions of Japan’s fiscal yearend.  The thinking is that capital repatriations for window-dressing purposes boost the yen in March, and the redeployment of wealth overseas in April causes the reverse effect.  This is a testable contention, and it doesn’t merit the attention this factor gets every March.  Although the yen rose 4.0% against the dollar in March 2008 and fell in just three of the last ten Marches, a wider perspective covering the last 29 years finds a pretty even split.  The yen rose in 16 instances and fell 13 times, recording an average net advance of just 0.4%. The average appreciation of the yen even during the last ten months of March was only 0.7%. Historically, the yen interestingly has displayed a more consistent and bigger bias toward strength during April than in March.

OPEC oil ministers gathering Sunday in Vienna are expected to cut production quotas yet again.  Oil prices remain 68% below the highs of July 2008 and almost exactly $100 under that peak.  On the economist’s proverbial other hand, oil has recovered 39% from last month’s cyclical low.  The juxtaposition of the peak in oil prices and of the EUR/USD last July 15th cements a connection at least in recent currency market history between the dollar and oil.  The logic is that falling or weak oil prices are symptomatic of weak growth and reasons for investors to be risk averse, which promotes demand for Treasuries and the dollar.  A a rise of oil prices, even though such erodes discretionary spending power, would be interpreted not so much as a victory for OPEC discipline as a sign that markets are looking for an end to the recession.  Less risk aversion would usher in a more vulnerable period for the dollar, according to conventional wisdom.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


Comments are closed.