Weekly Foreign Exchange Insights: July 31st

July 31, 2009

Foreign exchange trading has been dull so far this summer.  In FX, the summer is generally defined as the period confined between the U.S. Memorial Day and Labor Day weekends.  It often lasts fourteen weeks but comprises an extra week in 2009.  Ten have passed; five remain.  Each day seemingly has its own momentum.  Market chatter continues to relate shifts to the ebb and flow of risk aversion, which in turn bounces around depending on whether markets are hopeful or discouraged about economic recovery prospects.  Equities performed well in July, gaining 4% in Japan, over 7% in the United States and Britain, and more than 10% in Germany.  Those stock market gains suggest that optimism prevailed over pessimism most of the time.

Key dollar relationships, on the other hand, lack direction, suggesting greater agnosticism about the outlook for economic growth and about which economies will do comparative well.  Dollar/yen has hovered in the mid-90’s confined this summer between 98.84 and 92.99.  The mean value since Memorial Day of 95.5 lies very close to the 95.9 midpoint of the high/low boundaries.  EUR/USD cannot get away from $1.40.  It’s mean of $1.4041 during the past ten weeks was almost identical to the 1.4339 to 1.3749 range midpoint of 1.4044.  Dollar/Swiss has been likewise anchored near 1.08, with a mean of 1.0802 and a range midpoint of 1.0807.

Commodity-sensitive currencies have cast their lot with the economic optimists.  The dollar had posted losses this past week up to 15:15 GMT of 1.7% against the Australian dollar, which along with the kiwi experienced the biggest monthly gain during July in a couple of years.  Each of those currencies is about 6% stronger than ten weeks ago.  The Canadian dollar has risen around 3.6%, the rand has performed well, too.  Australian monetary officials served notice this past week that they may be among the first central banks to tighten, whereas their New Zealand counterparts continued to toe a dovish line.

Sterling figures to remain an enigma.  From highs of $2.1160 in November 2007 and 0.6722 euros in August 2007 as the financial market was first breaking, the pound plunged 36.2% to $1.3505 in January of this year and by 31.4% almost to par against the euro late last December.  Sterling’s devaluation early in the Great Depression is credited with insulating Britain from the worst brunt of the downturn.  With recoveries of 22.7% against the dollar and 14.6% against the euro from the above-mentioned lows near the cusp of 2008-9, the pound seemingly reflects optimism that Britain will emerge from recession sooner and faster than most economies and that the Bank of England will be among the first central banks to shift monetary gears. The problem is that so far history has not repeated the script from the early 1930’s.  Whereas stronger-than-expected second-quarter U.S. GDP data were reported today, with a quarterly decline of 1.0% annualized and a 3.9% drop of GDP from 2Q08, Britain experienced negative 3.2% growth from 1Q and a drop of 5.6% from 2Q08.  The mystery now is whether the sobering second-quarter figures lead investors to believe that sterling is overbought, especially given the unpopularity of a lame duck Labour  Government.  So far, sterling continues to hold its own.  In fact it made gains this past week against both the dollar and euro, surprising many pundits calling for a softer trajectory.

I’ve mentioned in recent issues of Foreign Exchange Insights that times may be ripening for greater hands-on government management of foreign exchange movement.  Only the Swiss have intervened, and U.S./Chinese talks last week stressed harmony, not confrontational currency politics.  The possibility of action by others to promote forex stability may be deterring the market from speculation and promoting dollar inertia.  In the first half of August when Europe essentially goes on holiday, intrinsic currency stability ought to persist.  After mid-month, investors may begin to act on their broader long-term expectations.  One doesn’t hear much bullish talk about the dollar.  Sometimes that can be a perfect backdrop for a gradual but persistent uptrend, but I do not think that is how dollar trading will play out in the autumn.  Long-term global economic health would be served better by an erratic depreciation of the U.S. currency than by an upward trend.

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


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