Weekly Foreign Exchange Insights: November 20th

November 20, 2009

Currency markets are not showing very strong convictions about future trends, and that’s understandable given the wide dispersion of projected economic growth in 2010 among economists.  Although the new year and decade begin in less than six weeks, a minority of analysts are projecting U.S. growth of 4.0%, others fear a relapse into recession, and most predictions lie somewhere between those wide extremes.  The past week saw risk aversion stage a comeback, not that it ever went away completely.  The backdrop included weaker-than-expected data, a disappointing Obama trip to China, and a renewed focus on when bank balance sheets might be able to handle an economic setback or other trigger for financial market distress.  Before the age of carry trades, this combination of factors would have depressed a currency with a pre-existing suspect image like the dollar, but now this mix is supportive.  Go figure.

Taken to the extreme, one might argue that the U.S. currency has become rout-proof, since the United States tends to set the table for the global economy.  A free-falling dollar would worsen global growth prospects severely, killing the appetite of investors for risk, and thereby creating dollar demand that would nip the crisis in the bud.  Of course, the dollar in reality is not immune to a sell-off.  Analysts also once believed in rational expectations all the time, thought a nationwide bear market in U.S. housing could never happen, believed that asset diversification would protect portfolios, and argued that current account imbalances were not only sustainable but a rather meaningless and irrelevant concept upon which to dwell.  If the events of the past decade taught us anything, it was that storms of the century happen much more often than sophisticated mathematical models predict.

That said, what impresses me most about currency trading so far this calendar quarter has been the dollar’s inertia.  It’s sticking near 1.50 per euro and JPY 90 like a magnet.  In the first case, markets are most comfortable when the dollar is a little off to the strong side of the benchmark, but the preference with dollar/yen is the opposite.  Taken together, currency markets are counting slightly more heavily on downside rather than upside growth risks but not enough to generate a major move in dollar/yen or euro/dollar.  For the first time since the week to October 9, the yen traded entirely on the strong side of 90, but it never moved past 88.64 compared to highs of 88.26 in the week of October 2nd and 88.01 in the week of October 9th.  The past week also saw the Australian dollar return closer to ninety U.S. cents.  A third key relationship stuck near 90 was sterling’s euro cross (0.8999 at this writing).  Meanwhile, another week has passed without the Swiss franc or Canadian dollar strengthening through dollar parity.  Having been as close as 1.0029 and 1.0207 per USD earlier this quarter, the franc and Canadian dollar each moved farther away from par this past week.

For volatility-seeking investors, commodity currencies continue to offer the best opportunities.  With risk appetite fading, the New Zealand, Australian and Canadian dollar were showing respective weekly net drops at 15:50 GMT today of 2.7%, 2.3%, and 1.9%.  Another factor in play besides the swing in risk aversion was the protest of officials in these economies.  Verbal intervention is hardly new, and not limited to commodity-sensitive economies.  In light of China’s emphatic rejection of calls for it to let the yuan rise soon, however, governments are on their own.  Unless the dollar achieves an upside breakthrough in trend, which seems dubious in the remainder of 2009, China’s currency could extend its significant losses against these currencies.  The same is true for emerging markets that compete with Chinese goods in foreign and home markets.  Actual currency intervention, not just verbal jawboning, has been extensive already by many emerging economies.  More of the same seems probable.

The defining event next week is the U.S. Thanksgiving holiday, which has its own peculiar seasonal distortions.  The bias recently has favored a weaker dollar.  The table below looks at the past five years and documents movements of the dollar against the euro and yen in the week of Thanksgiving as a whole as well as the breakdown from the prior Friday close to the close in New York on Wednesday and between close on Wednesday and the end of the week, when trading desks tend to be very thin.  Note that in the exception, 2005, the dollar had trended upward from the start of the year into the final quarter, peaking against the euro in November at $1.1640 and in December at 121.26 per dollar.  In 2006, the dollar depreciated as far as 1.3370 per euro and JPY 108.97.  So even though the dollar advanced in the week of Thanksgiving in 2005, it was near to the break point of a prolonged rise.

  % Chg in USD Full Week Thru Wed After Wed
2008 Versus euro -0.9% -2.3% +1.4%
  Vs yen -0.4% -0.2% -0.2%
2007 Vs euro -1.1% -1.3% +0.2%
  Vs yen -2.4% -2.4% 0.0%
2006 Vs euro -2.0% -0.9% -1.1%
  Vs yen -1.6% -0.9% -0.7%
2005 Vs euro +1.5% +0.6% +0.8%
  Vs yen +0.5% -0.3% +0.8%
2004 Vs euro -2.1% -1.2% -0.9%
  Vs yen -0.4% -0.2% -0.2%


The week after Thanksgiving is additio
nally valuable as a reality check of the optimism of American voters.  Sitting around the Thanksgiving dinner table, families come together from distant points of the country and share personal observations about national economic and political trends.  From those discussions, market participants emerge with new insight into what’s happening in other regions, and sometimes a fresh consensus develops.

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


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