A Sideshow

December 7, 2012

The striking trait about recent movement in key dollar relationships is their continuing unremarkability.  Very interesting stuff has been happening on the policy front, and this is the sixth straight December in which investors have compelling grounds to be unhappy about the state of most developed economies and many emerging markets.  But the thrill seems gone for this observer of four decades of floating dollar exchange rates.  Back in the day, it was not unusual for big cumulating swings in the dollar to generate important future implications for growth and inflation, not to mention U-turns in macroeconomic policy.  Nowadays, dollar shifts against the yen, euro, sterling, Swiss franc or any of several commodity-sensitive monies are a collateral sideshow, which is ironic in light of the proliferation of on-line currency trading platforms for aspiring at-home currency traders.  It’s a lot harder to make consistent forex profits in the current environment, and that’s not to say that sustained success in this counter-intuitive field was ever particularly easy.

Between the ends of October and November, the dollar moved on balance by less than 0.7% against the euro, Swiss franc, sterling, C-dollar, A-dollar and New Zealand dollar.  The largest of those changes was a 0.6% depreciation against the loonie, which nonetheless never threatened to escape the gravitational pull of 1:1 parity with the U.S. currency.  The Japanese yen fell 3.2% last month but just 0.1% in the first week of December.  This week saw the euro repel against $1.30 and close down 0.5% for the week and a mere 0.1% from its end-2011 level.  The dollar has risen this week by 0.7% against the Swiss franc but dropped 1.5%, 0.5%, and 0.4% against the kiwi, Oz, and loonie.  Sterling like the yen is 0.1% softer.

In times of disinflation and historically low interest rates such as these, currency weakness rather than strength is desired to promote macroeconomic priorities.  Officials from Japan to Switzerland, Australia, Peru, New Zealand, Canada, and the United States (in the case of the Chinese yuan) have for some time been displeased that their currency wasn’t weaker.  Japan, in particular, has made clear that more proactive policies are coming to depreciate the yen.  The Liberal Democratic Party appears well-positioned to lead the government after December 16th, and that will give it the opportunity to appoint a more dovish leadership team to steer monetary policy over the coming five years.  90 per dollar is a conservative estimate of where these officials would like to see the yen trading six months from now.  As at the Fed, indicator-driven policy guidelines could be adopted.  The Swiss National Bank, which introduced a managed currency regime in September 2011, is conducting a quarterly policy review next week.  Such offers a chance to ratchet the franc lower.

The FOMC, OPEC, and European Council of leaders also meet next week.  The Federal Open Market Committee is widely expected to announce additional significant stimulus. A scheduled press conference afterward enables Chairman Bernanke to accompany the central bank’s action initiatives with a spin that he hopes will promote the market response that officials seek.  One unspecified but generally understood goal of the Fed’s virtual zero interest rate policy and ongoing quantitative easing is preventing dollar appreciation and maintaining downwardly skewed risks in currency outlook.  OPEC’s meeting in Vienna is unlikely to take any fresh action.  West Texas Intermediate crude oil prices are trading very close to the five-year average of $86.71 per barrel, and officials in the cartel seem comfortable with this status quo.  Markets have become desensitized to seemingly endless European meetings.  When leaders of the EU gathering in Brussels Thursday and Friday for their formal six-monthly confab as planned, attention will be particularly focused upon preparation for new bank capital rules.  In retrospect, the game changer in Europe already happened and was the ECB’s OMT initiative.  Although the facility is still untapped, confidence persists that its potential availability makes a breakup of the currency union very unlikely in the short run, and that’s a sufficient condition for now to avoid a run on the euro.

No calendar month offers more seasonal bias in foreign exchange than December, because of holiday interruptions and the need to shut trading books.  Historically, the week before Christmas tends to be quieter than the final week of the month.  Since the onset of the financial crisis, moreover, the first half of December has experienced more currency movement than the latter half of the month as can be seen in the following table of movements of the dollar against the euro.  Since the first week of the month was quiet, this pattern suggests a potential for volatility in the second week of the month.

Chg in USD 2007 2008 2009 2010 2011
IH-Dec +1.4% -7.3% +3.2% -1.7% +3.3%
2H-Dec -1.2% -2.0% +1.5% -1.2% +0.4%


In the last normal week of 2012, quite a few potential market-moving economic indicators get released.  The United States reports industrial production, small business sentiment, retail sales, the CPI and PPI, and the trade balance.  The Bank of Japan will be releasing its quarterly survey of business conditions and expectations, while the Noda government will be engaged in the final week of campaigning before parliamentary elections on December 16.  Revised GDP, the current account, machinery orders, and the tertiary index of monthly service-sector activity are some of Japan’s data releases next week.  China announces November results for its varied indicators covering inflation, industrial production, retail sales, money and credit growth, trade and business investment.  In Europe, preliminary PMI results for the euro area, Germany and France are due, and so are British labor statistics.  Finally, if a partial deal cannot be hammered out during next week between the Obama and Boehner teams on fiscal policy, investors uneasiness will begin to mount more discernibly.  A deal before now was never really plausible, and in any case, low expectations have been discounted into market prices of how much will eventually get done this month.  Still, the presumption exists that something will happen to avert the full automatic dose of austerity on January 1.  One would like to see signs of progress by mid-month.  If not, that will be another reason for markets to show a livelier pulse next week.

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

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