Strength of Commodity Currencies Belies High Concern about Global Growth

September 10, 2010

Many major currency relationships have been tightly confined lately. 

The yen got a boost when Chinese officials unhinged the yuan from the dollar in mid-June, even though many weeks passed with China’s currency acting as if it were still pegged to the greenback.  With an eye toward diversification, the Chinese have become bigger and steadier buyers of Japanese bonds.  Dollar/yen had been above JPY 90 in the week to June 18 but posted successive weekly lows of 86.97 in the week of July 2, 87.02 in the week of July 9, 86.26 in the week of July 16, 86.35 in the week of July 23, 85.94 in the week of July 30, 85.03 in the week of August 6, 84.75 in the week of August 13, 84.90 in the week of August 20, 83.69 in the week of September 3, and 83.35 this past week.  From the yen’s standpoint, it’s a slow, upward grind toward a possible eventual rendezvous with the all-time peak of 79.85 set April 19, 1995.  From late in 1995 until March 2008, the yen had stayed weaker than 100.0.  But for many Japanese exporters now, the yen is past the point of profitability.  Escalated verbal intervention by Japanese officials has slowed but not stopped the appreciating trend.  If Ichiro Ozawa becomes Prime Minister after Tuesday’s DPJ leadership vote, a more interventionist policy in the broadest and narrowest sense seem likely.  The government hasn’t admitted to yen sales against the dollar and euro yet, but the sticky behavior of Japan’s currency suggests more subtle channels of control like yen selling by the government agency Kampo are being utilized. In 2010, the yen has move more sharply against the euro than the dollar, advancing 27.4% from 134.38/EUR in January to a high of 105.44 on August 20.  It nearly revisited the peak, touching 105.79 this past Wednesday.

The euro has traded exclusively below $1.3000 since August 11.  The low this past week of $1.2643 was almost identical to the average low-point among each of  the previous four weeks, which was $1.2645.  The highest of those four lows was $1.2753.  For 2010 thus far, the euro has ranged between a high of $1.4582 and a low of $1.878 in early June.  The common currency’s karma remains mostly negative.  One depressant is the high exposure of European banks, especially in Germany, to the sovereign debt problems of the peripheral countries such as Greece, Spain, Portugal, Italy, and Ireland.  Their bond yield premiums vis-a-vis German bunds widened this week.  Another concern is that although euro area growth last quarter of 3.9% annualized surpassed growth in the United States and Japan, its been very uneven.  GDP in 2Q contracted 5.8% in Greece and firmed just 0.7% in Iberia.  The ECB will continue practices of enhanced credit support at least into the early part of 2011 but, unlike the Fed, has not suggested that it might resort to tougher forms of quantitative easing.  Although 20.6% weaker than its 2008 and all-time high, the euro has found support above $1.25 and remains comfortably above its lifetime average value of $1.1852.

Except for a brief touch of $1.6002 in early August, the British pound has carried a $1.5 handle since midyear.  The Conservative-led British government elected this past spring gets the gold medal for policy vision, innovativeness, and sheer boldness.  The gamble will certainly usher in an extended period of slower economic expansion and may send Britain back into recession.  So far, the Bank of England is resisting any temptation to provide a pre-emptive counterweight to the coming massive fiscal restraint.  Sterling advanced 13.4% against the euro from March 1 to June 29 but hasn’t extended that recovery. 

The currency benefiting  most from Euroland’s sovereign debt problems is the Swiss franc, which as explained in a post from this past Wednesday has reverted to a role the currency acquired in the 1970s.  Ironically, that was an era of elevated global inflation, and disinflationary forces now seem stronger than inflationary ones.  The two eras have in common a sense of crisis, great uncertainty and wide disparities between well-performing and troubled economies in Europe.  Switzerland’s political independence promoted currency strength then, as now.  The losses of the Swiss National Bank on FX intervention earlier this year have also emboldened investors to believe nothing can be done to push the franc significantly lower.  From a 2010 low against the euro at the start of the year to a high this week of 1.2760 per euro, the franc climbed nearly 17%, but its approach of unity against the dollar may generate some new resistance looking just ahead.

One might expect commodity-sensitive currencies to trade inversely with the Swissy.  Investing in the former represents a bet in favor of continuing decent global growth.  The Swissy has thrived on uncertainty and low confidence in Euroland’s one-size-fits-all monetary policy and America’s ability to avoid a brush with a double-dip recession, but commodity currencies have also performed well as a group.  The Australian dollar traded entirely above 90 U.S. cents this past week for the first time since the opening week of August, and there hasn’t been a week in which it fluctuated exclusively below 90 cents since July 23.  This past week saw the Aussie as high as USD 0.9277, within almost a penny of its 2010 peak set in April.  The currency also set a new record high against the euro.  The kiwi likewise has been stronger than USD in ten of the last eleven weeks.  Today saw it penetrate 73 cents briefly and trade less than one and a half cents from its 2010 peak last January.  The Canadian dollar hasn’t been stronger than 0.9931 this year, and that peak was reached in the first trimester of the year.  The loonie was at 1.0672 per USD as recently as the final day of August but got as strong as 1.0063 this month.  U.S. dollar parity has been a very tough barrier to cross for Canada’s currency as well as the Swiss franc.  Excessive appreciation in the South African rand was cited the Reserve Bank’s explanatory statement as a factor behind its 50-basis point repo rate cut to 6.0%.

Many significant economic indicators are being released by key industrialized economies in the coming week.  Some highlights include U.S. retail sales, current acount and consumer prices, Japan’s tertiary service-sector index, Euroland industrial production, CPI, and ZEW index of investor sentiment, British consumer prices and retail sales, and Canadian productivity and monthly survey of manufacturing sales and orders.  However, the tone for the week may be set by tomorrow’s release of many Chinese monthly statistics and whether, as speculated, such are used to justify an initial central bank rate hike in China before the week begins.  India and Chile are other developing countries with scheduled central bank policy meetings and thus opportunities to raise interest rates and strike a further contrast between the dynamism of that part of the world economy and the multiple problems in older and more advanced economies. 

The ninth anniversary of the 9-11 terrorist attacks, the on-going U.S. congressional election campaign, and the muddled politics of Japan are other events that will cast the developed economies in a stew of introspective confusion.  At the time, September 11, 2001 instilled a belief that America had crossed a major watershed that would separate what came before from the future in stark ways.  The big fear was that more massive atrocities would be visited on the nation.  That hasn’t happened, but things undeniably have taken a bad turn.  No matter who’s in charge, polls show more and more people answering “no” to the famous Reagan question, “are you better off than you were four years ago?”  Despite an inventive technological revolution, the U.S. economy has performed considerably worse in this period than earlier, and that’s true of time before 2008 and well as after.  Many factors caused this turn for the worse, among which has been the distraction of 9-11.  The long-term goal of the terrorist attackers was to destabilize Western civilization, foul up the U.S. economy and derail the march toward globalization.  Framed that way, the 9-11 strategy has been a resounding success.  It’s difficult to imagine the United States retaining its economic and geopolitical hegemony if victory or at least a draw are not achieved ultimately in this struggle.  If the outcome is worse, power may not shift to Europe or Japan, however, but rather toward China, India and other developing nations.  Currency trading among the usual easily convertible suspects has become a chase to find places with more bearable liabilities than appealing assets.  In such a climate, market swings can arise and disappear abruptly without warning.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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