Thanksgiving Week 2011

November 18, 2011

Currency markets next week will be contending with the still unfolding euro debt crisis as well as the peculiarities of the U.S. Thanksgiving Holiday closure.

During Europe’s crisis, which began its third year this month, conventional wisdom has felt that currency movement was only weakly related to national economic fundamentals and instead dominated by frequent shifts in risk preference depending upon whether investors are hopeful or discouraged about a resolution of the problem.  The mood has been pessimistic more times than not and increasingly so, as ensuing political deals unraveled from lack of implementation or new flare-ups in tension within and between members of the common currency area.  At times when investors have shunned risk, the dollar, yen, and Swissie have been favored.  Peripheral yields in the euro area have climbed both absolutely and relative to German bunds, and share prices have performed poorly in Asia and the United States as well as Europe.

Plentiful daily anecdotal evidence exists to support the conventional wisdom of currencies being dominated by risk on/risk off switches.  However, when steps back and examines currency movement from a longer perspective, however, the correlation becomes murkier.  The table below documents changes in the dollar against selected other currencies over three periods and is based on quotes for today that were taken at 15:00 GMT and New York closing rates for previous historic dates.  The first period compares current rates to a week ago, November 11.  The second period compares quotes on November 18, 2010 to levels today, and the third looks at the changes between November 18, 2009 and November 18, 2010.  These second and third sets of data quantify dollar net movement over the second and first years of a euro debt crisis that has broadened and deepened progressively since surfacing two years ago.

USD versus Past Week Year to 11/18/11 Year to 11/18/10
Euro +0.9% +0.7% +9.7%
Yen -0.4% -8.1% -6.5%
Swissie +1.1% -8.1% -1.4%
Sterling +1.8% +1.6% +4.4%
C-dollar +1.3% +0.6% -3.4%
AUD-dollar +1.2% -1.5% -6.1%
Kiwi +2.4% +2.3% -0.4%
Yuan +0.1% -4.4% -2.7%


The table highlights a number of interesting developments.

  • The bulk of the dollar’s net change over the past year against the euro, pound, loonie, and kiwi occurred this past week.
  • The dollar posted identical 8.1% declines against the yen and Swiss franc during the past twelve months.  Those two currencies share similar economic profiles:  very low inflation and interest rates, a chronic current account surplus, substantial cumulative appreciations over the past forty years, and governments that periodically have taken strong measures to thwart currency appreciation.
  • The dollar rose considerably more sharply against the euro during the first year of the sovereign debt crisis than in the second year. 
  • Sterling has also been stronger in the more recent twelve months despite a more troubled British economy than in the first year of the crisis.
  • All three commodity-sensitive currencies in the table traded very weakly this past week but show greater diversity between the two sequential years.
  • Chinese foreign exchange policy is hardly influenced by foreign calls for the yuan to appreciate substantially.  At best, it is plodding upward but continues to face two-sided risk manufactured by officials who micro-manage the currency closely.

Stocks and bonds corroborate the intensification of the euro debt crisis better than do dollar relationships.  Share prices in the United States, Germany, Japan, Switzerland, Great Britain and Canada actually rose on balance during the year to November 18, 2010 in contrast to drops over the latest twelve months that surpassed 15.0% in Germany, Japan and Switzerland and ranged between 7.1% and 7.5% in the British and Canadian instances.  Interestingly, the S&P 500, which rose 7.8% in the first year of the debt crisis, also shows a tiny net 1.8% net gain over the past twelve months.  Ten-year bond yields fell during each year in all of these countries, and only Japan experienced a larger drop in the first year than over the course of the second year.  The dollar’s greater net weakness over the past twelve months than in the first year of the crisis does not seem to reflect an inaccurate perception that the crisis has become a more dangerous and less manageable threat to Europe and the world economy.

Instead, the dollar’s failure to perform more strongly in year two, notwithstanding this past week’s big gains, appears to reflect the fact that the unit shoulders some adverse baggage of its own.  The deadline for automatic across-the-board cuts in U.S. federal spending arrives this week and will highlight the failings of the U.S. political process and market economy.  Although the dollar’s dominance of reserve asset portfolios hasn’t been seriously challenged since the Second World War, the presumption until recently that it will not be dethroned from that special status for decades, if not generations, is being questioned by more analysts.  Similar to global warming, a date of reckoning may be nearer than many think, and the steady, on-going process of reserve asset diversification serves notice that many investors are hedging their bets.

The uniqueness of America’s Thanksgiving Day holiday is that it is the most disruptive one to trading that is not shared by other countries.  Falling on a Thursday, it has become tradition for many workers to take four, five, or even a full week off.  Unlike the major holidays of other seasons, Thanksgiving is a time when families that may live far apart most of the time to come together and share reflections.  The festival provides a venue for taking stock of the state of the nation and the world and expressing fears as well as hopes.  Thanksgiving also kicks off the Christmas shopping season, thereby providing another dimension to the holiday’s role as reality check and opinion molder.  After the week of Thanksgiving, there are just a few weeks left in the calendar year to act on what new insights have been learned, and during the week of Thanksgiving, trading can suffer a lack of leadership from the skeletal participation of the U.S. market. In other holidays experienced by the United States but not other nations, that lack of leadership can translate into reduced dollar volatility, but that’s not always the case with Thanksgiving.  During the Thanksgiving week of 2010, the dollar advanced by 3.3% against the euro, 2.2% versus sterling, and 1.0% against the Swiss franc.  And during Thanksgiving week 2009, dollar/yen plunged 3.7%.

The data release calendar next week is comparatively light quantitatively and qualitatively.  Two highlights will be revised third-quarter U.S. and German GDP statistics.  There are fewer central bank meetings than occurred this past week.  Minutes from the Bank of England’s November meeting will be combed for further evidence of a readiness to expand quantitative easing again as early as December.  Considerable chatter can already be heard that the ECB may cut its key rate for a second straight month in December, but the main focus there will be on whether signals are given that suggest a wider ECB role in directly diffusing the debt crisis, a recommendation which Bank officials until now have batted away.  In terms of currency price action, the mid-1.30s are not a stable place for dollar/euro to consolidate around.  Typically, major currency pairs tend to find greater stability closer to a big figure, say either 1.33 or 1.38 per euro in this instance.  The Swiss franc should be watched to see if it pushes toward 1.25 per euro, a level that market chatter believes Swiss National Banks to prefer over $1.20.  Finally, sterling has been attracting more attention, as a currency that for over a year has performed better than British fundamentals — higher inflation, big twin external and budget deficit, loose monetary policy and a rising risk of recession — seem to justify. 

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

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