Currency Thoughts

Entering the Summer Season of Currency Trading

May 25, 2012

The summer season for currency market participants, which lies between the U.S. Memorial Day and Labor Day weekends, has a wholly different feeling from the winter/spring or autumn trimesters.  Because of the comings and goings of vacationing dealers, summer volume tends to be more volatile, depriving the marketplace of the depth, breadth and resiliency found in the other seasons.

In the thirteen prior “summers” since the euro’s launch, the dollar rose six times against the common European currency and fell seven times.  Most of the moves were small like the rise of 0.7% last year, an uptick of 0.3% in 2005, and a dip of 0.8% in 2006.  The average change in summer over the 13 years was a mere rise of 0.1%. Dollar/yen has been more volatile than dollar/euro in summer, averaging a U.S. currency loss of 1.8% over the thirteen years, including drops of 1.9% in 2009, 6.2% in 2010, and 5.0% in 2011. 

Don’t let the summer doldrums fool you.  Many of the profoundest currency market events happened during the calendar year’s middle season.  Nixon ended dollar/gold convertibility in August 1971, Iraq invaded Kuwait in August 1990, the world financial crisis began in August 2007, and a failed coup in the Soviet Union in August 1991 marked the beginning of the end for that empire.  In 2008, oil prices peaked above $145 per barrel in July and reversed course dramatically.  There have been big directional U-turns in the dollar during summer, and several intra-European currency crises before the age of the euro had their initial tremors in the summer vacation season.  The start of a massive bear market in equities on the Wednesday after Labor Day 1929 triggered the Great Depression with strong assistance from fouled-up fiscal and monetary policy responses.

What a difference a year makes!  In my pre-Memorial Day foreign exchange insights essay of 2011 entitled State of the Dollar, I asserted that the dollar ought to be performing better than it was.  I argued that economic fundamentals were moving more clearly in the dollar’s favor and that past depreciation put the U.S. currency in good position to capitalize on the changed fundamentals.  But I observed that the dollar then “still lacked good traction,” cautioned that a return to true dollar hegemony would require more than a few months of uptrend, and drew an important distinction between the dollar’s continuing dominance of reserve currency assets and the paradoxical historical tendency for the dollar to trade poorly against other currencies.  A year ago, I wrote

Risk aversion has made a partial comeback as analysts have revised global growth prospects lower.  Japan is in recession, and the European Monetary Union faces an extremely uncertain future and perhaps death in its current form.  U.S. GDP is likely to expand roughly twice as rapidly during 2011-12 as GDP in the euro area, Great Britain or Japan….  Over the past ten years, it has netted losses of 52.1% against the franc, 38.8% against the euro, and 33.2% against the yen.  The dollar also has lost substantial value against precious metals….  40 years of floating dollar rates have underscored that it takes more than diversification to knock a currency off the dominant reserve currency pedestal.

It took a while after the above was written, but a year later, one finds the euro well on its way to revisiting its June 2010 low of $1.1878.  The dollar gained 7.8% in three months from 1.3486 per euro on February 24 and 1.2825 earlier this week to 1.2516 on May 24.  Whether or not the euro survives the summer intact with all 17 currencies to fight another day, it will continue to be viewed as a tarnished good.  And so long as the one-size-fits-all currency framework continues, it will be imperative for that currency to trade softly to support growth in those EMU members that are in the grasp of deep recession.

The table below compares dollar changes thus far in 2012 (as of 14:25 GMT today) with movements in the final trading season of 2011 and changes in the “summer” of last year.  The U.S. currency gains last autumn were generally greater in magnitude than appreciation to date in 2012.  But as noted, pro-dollar momentum picked up in May.  One might add that recent trading conditions in part have reprised the late 2008-early 2009 period, when stocks tumbled in a flight to safety that benefited the U.S. currency and fixed income securities.

Dollar versus	Year-to-Date	Autumn 2011	Summer 2011
Euro	+3.4%	9.7%	+0.7%
Yen	+3.5%	+0.2%	-5.0%
Pound	-0.9%	+4.4%	+1.6%
Swissy	+2.2%	+18.8%	-7.3%
C-dollar	+0.9%	+3.7%	+0.4%
A-dollar	+4.7%	+4.3%	+0.1%
Kiwi	+3.0%	+8.8%	-3.7%

 

At this cusp between the first and second currency market seasons of 2012, a few currency-specific notes bear mentioning.

• The Japanese yen remains historically high, and Finance Minister Azumi protested yen strength yet again today, blaming such on safe-haven demand churned up by the European debt crisis.  In the ten years prior to 2009 when Europe’s problems surfaced, the yen’s closing levels before the Memorial Day weekend had ranged from 103.35 to 124.63, and the currency had exhibited a tendency to converge during the summer season on a range of 110-120 per dollar.  Pre-Labor Day closing levels over the ten years had ranged between 108.86 and 118.67.  The yen today traded more strongly than 100 per euro and lies near its year-to-date mean of 79.8 per dollar.  A weakened Japanese trade and current account ought to permit further yen depreciation, but a few forecasts floating out there in the market of a dive to nearly 100 per dollar by yearend seem wildly unrealistic.
• The Canadian dollar looks comfortable trading near parity against its U.S. counterpart.  It is presently much closer to its 2012 range low of 1.0288 CAD per USD than to its strongest level this year of 0.9800.
• The Australian dollar is also trading near U.S. dollar par and, like the loonie, is presently in the lower part of its 2012 trading range.  This isn’t surprising.  Both economies are sensitive to commodity market conditions, and commodity prices are tailing off.  Note that the kiwi has also dropped this year.
• The Swiss franc continues to hover very near the Swiss National Bank’s line in the sand, a permitted ceiling of 1.2000 per euro.  The franc last traded more weakly than 1.2049 per euro on March 30.  Any dramatic rupture in the euro would put the Swiss currency policy to the ultimate test, and officials are likely to lose in such a tug of war with investors.
• From April 18 through May 15, sterling had been quoted at $1.6000 or higher every trading day.  That was impressive given Britain’s back-to-back quarters of negative growth in 4Q11 and 1Q12.  The drag of euro depreciation against the dollar and additional negative risks to Britain’s economy  should Euroland’s problems become even worse has overcome the pound’s earlier resilience.  Within 9 days from mid-May to the 24th, the dollar advanced by 3.0% against sterling.  As a curious sidelight, today saw an eclipse at 1.567 of cable (dollar versus sterling) and the synthetic D-mark versus U.S. currency value, which is derived by dividing the mark’s par value of 1.95583 per euro by the present spot dollars per euro rate.  With a chance that the euro may break up this year, the values at which participants in the European Common Currency merged their national monies on December 31, 1998 take on more than academic significance.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: Canadian and Australian dollars, Dollar, Euro, Sterling, Swiss Franc, Yen

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This entry was posted on Friday, May 25th, 2012 at 9:39 am and is filed under Foreign Exchange Insights and Next Week. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.