The First Six Weeks of 2011 in Forex

February 13, 2011

Major dollar relationships have traded in generally narrow ranges for the most part so far this year.  A number of themes have emerged, which in the aggregate have not imparted any cumulating movement to currency markets.  Investors are watching

  • The U.S. labor market.  While the growth of jobs has remained slow, the unemployment rate and new jobless claims have dropped surprisingly fast.  Economic recovery seems more secure in America than it did in December. 
  • The potential for global inflation.  Commodity prices are elevated, and domestic inflation is intensifying in many emerging markets.  The Fed’s quantitative easing continues to inspire mistrust among many analysts and global investors.  A collateral concern is that fiscal and monetary policy in America are on a slippery slope and may ultimately squander the dollar’s preeminent reserve asset functionality.  When that loss might happen is anyone’s guess, but the possibility is already crimping the dollar’s upward potential regardless of what other developments are happening.
  • Sovereign debt in Euroland has been addressed awkwardly.  The euro is not an ideal reserve asset candidate as a result.
  • Rising long-term interest rates are considered a dollar support.
  • Britain is out front ahead of other governments in implementing substantial fiscal restraint and being watched carefully for signs if tough medicine can be tolerated by advanced economies so soon after the great recession.
  • The unrest in Egypt introduced a new and unforeseen set of uncertainties.  How will oil prices respond from here?  The Egyptian military has made reassuring overtures, but Middle East geopolitics could still take a nasty turn.

Although the euro has traded in a ten-cent range this year between $1.2875 on January 10 and $1.3861 on February 2, its mean value of $1.3458 is near to its closing values in the past two weeks of $1.3588 on February 4 and $1.3550 on February 11.  A comfort zone has been found in the mid-1.30s, a level that is stronger for the euro than is launching value in 1999 and its lifetime mean. 

Yen/dollar touched 83.67 on Friday, February 11, matching the yen’s 2011 low first set on January 7.  The yen’s 2011 high-low range of 83.67 – 80.99 is only 3.3% in width, and Friday’s closing of 83.44 was just 1.1% away from the year’s mean of 82.52.

The Swiss franc closed at 0.9542 per dollar on February 4, very near to its 2011 mean of 0.9562, but the dollar strengthened 1.9% against the Swissy last week to close at 0.9725.  The high-low boundaries so far in 2011 are 0.9785 and 0.9322.

The British pound has ranged between a high of $1.6277 and a low of $1.5410 this year, with an average value of $1.5882.  However, such closed above $1.60 in the past two weeks.  The Bank of England has not raised its 0.5% Bank Rate yet, even though consumer price inflation has intensified to 3.7% on its way to over 4% later this year.  Early signs on U.K. growth, however, point to a return to positive territory in the first quarter of 2011 after a surprising 0.5% contraction of GDP in the final period of 2010.

The Canadian dollar continues to trade on the strong side of U.S. dollar parity but only barely so.  The average value for 2011 has been 0.9931 per USD so far, and it closed the past two calendar weeks at 0.9879 on February 4 and 0.9869 on February 11.  However, the loonie was as weak as 0.9986 during the past week.

The gravitational force of unity has also anchored the Aussie dollar, which shows an average 2011 value of $1.0003 thus far.  The AUD closed last week at 1.0019.  The kiwi has fluctuated this year between USD 0.7830 and USD 0.7528, with a mean value of USD 0.7673.  It closed February 4 at USD 0.7684 and softened 1.1% last week on balance to USD 0.7599.

The travails of the Chinese yuan has been a proverbial exercise in “Waiting for Godot.”  The incentive to appreciate the yuan is mounting.  Doing such would help fight rising inflation.  China CPI data due Tuesday will probably show over 5% inflation, and the PPI is likely to exceed 6%.  Money and bank lending data due on Monday will show very strong growth in spite of three interest rate hikes and many increases in reserve requirements.  The Obama Administration again recently restrained itself from declaring the Chinese government a “currency manipulator.”  But the fact remains that Beijing officials continue to intervene massively to counter upward pressure on the exchange rate.  Chinese reserves shot up $199 billion in the final quarter of 2010 to $2.85 trillion, and the yuan’s dollar value on February 11 was no different from its level at the end of December.

The hallmark of dollar trading in the first six weeks of 2011 was stability amid offsetting market forces.  The week ahead offers the release of many meaningful economic indicators, but it will take more than statistics to break the dollar’s stalemate.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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