Weekly Foreign Exchange Insights: May 1st

May 1, 2009

The trend toward lessening risk aversion, which favors the currencies of Europe and commodity sensitive economies over the yen and dollar, faces three hurdles next week. 

  • The spreading swine flu could reinvigorate the recession in world trade and output with new energy. 
  • Results of the U.S. bank stress tests could set off a wave of profit-taking in world equities. 
  • A lot of new information will surface besides the stress test results.  Many countries will report new manufacturing and service-sector purchasing manager indices.  Labor statistics will arrive from the United States, Canada and Australia. German industrial production, orders and exports are due.  So is Euroland retail sales.  The ECB holds a particularly important press conference, unveiling just how deeply its officials plan to move into quantitative easing.  There are also central bank meetings in Australia, Britain, Norway, Eastern Europe, and Latin America.

Several key currency rates happen to be hovering near whole figures, against which their strength or weakness will be judged during May.  In no special order these levels include 100 yen per dollar, 1.30 dollars per euro, 130 yen per euro, 0.90 pounds per euro, 1.5 dollars per pound, 70 U.S. cents for Australian dollar, and 1.20 Canadian dollars per U.S. dollar.  Two related barometers of risk aversion from the commodity world are gold and oil.  Gold has fluctuated on both sides of $900/ounce, while oil is now in the vicinity of $50 per barrel.  The table below compares latest quotes to their monthly averages so far in 2009.

  Jan Feb March April May 1st
EUR/$ 1.3258 1.2798 1.3061 1.3181 1.3252
$/YEN 90.36 92.60 97.72 98.89 99.16
EUR/YEN 119.8 118.5 127.6 130.5 131.5
AUD/$ 0.6755 0.6495 0.6666 0.7128 0.7260
$/CAD 1.2249 1.2452 1.2634 1.2273 1.1909
GBP/$ 1.4438 1.4419 1.4190 1.4690 1.4877
GBP/EUR 0.9183 0.8876 0.9204 0.8973 0.8912
Oil 42.06 39.18 48.07 50.05 52.08
Gold 862.07 940.54 927.02 890.84 885.40


Between last July 15th and October 28th, the dollar rallied 30% from a low of 1.6038 per euro to 1.2331.  It did not revisit its late-October high during the rest of 2008 or the first third of 2009 and has traded mostly on the weak side of $1.30 this year including now.  The dollar needs a spike in risk aversion to break to new highs against the euro but does not appear predisposed to a significant bout of fresh weakness, either.  The U.S. and European business cycles are in similarly very depress stages and associated with considerable uncertainty.  Short- and long-term interest rate differentials between the two regions are not meaningful.

Sterling would be the weakest major currency if foreign exchange movements were perfectly correlated with market chatter.  Sterling got clobbered in the second half of 2008 but has been resilient this year, even withstanding horrible admissions contained in last month’s annual British budget.  The dollar fell 4.6% against the pound between end-March and end-April, edging closer to $1.50, a level last seen on January 12th.  Having already fallen 27% from $2.04 in mid-March of 2008, the pound already discounts plenty of bad news.  Analysts still speak disparagingly about sterling despite its recent rise.  Against the euro, sterling had a stronger average value than 0.90 in February and April but was weaker than that benchmark in January and March.  That alternating pattern suggests that sterling may not perform as well in May and it did last month.

Japan has been the hardest-hit economy in this recession, but some upside data surprises have even occurred there mainly in signs of progress in running down inventories.  If industrial production is to stabilize, however, exports will have to fall less sharply.  These were depressed not only by the recessions in Japan’s export markets but also by the yen’s rise while risk aversion was spiking. No country has a greater vested interest in a continuing revival of risk-seeking investor behavior than Japan.  In that regard, the coming week could be pivotal in setting the yen’s tone over the coming two months. The yen found little support at 130 per euro.  The 100 yen per dollar level holds especially heavy psychological significance.  Tokyo officials are hoping the dollar can clear that barrier, too.

Euro-Swiss is the common currency’s third most important cross rate.  Despite intervention by Swiss officials, the franc had grinded its way back toward 1.5066 earlier today from a low of 1.5447 on March 16th.  That slippage almost represents a 50% retracement of the franc’s peak-to-trough decline after Swiss National Bank officials announced their opposition to any further appreciation of their currency.  Changes in the world outlook since early March may have modified how committed Swiss authorities are to subordinated domestic monetary policy to an exchange rate target.  Marke
ts may try to probe the 1.50 francs per euro level to clarify the Swiss central bank’s stance.

Diminishing risk aversion has lifted oil prices but depressed gold.  Oil prices have recovered almost 54% since St. Patrick’s Day, whereas gold is again under $900 and more than 14% below last year’s peak despite the explosion of government deficit spending around the world and talk that such creates a risk of much higher future inflation.  Canada tends to most sensitive to swings in oil, while Australia is influenced more keenly by what happens to gold.  Despite the divergent trends in these commodities, both the Canadian and Australian dollars have been trending higher in 2009.  It does not appear that penetration of US$ 0.7000 or C$ 1.2000 will throttle those trends.  It would rather take a new upsurge in risk aversion.

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


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