A New Year Starts to Take Shape

January 10, 2013

Last year was a difficult one for the world economy, but 2013 has begun on an upbeat note. 

  • The full and immediate drag of the fiscal cliff on the U.S. economy was watered down considerably by a last-minute accord between Republicans and Democrats.  Additional positive buzz came from predictions of a coming plunge in U.S. dependency on imported oil.
  • The United States and Canada reported solid labor market figures for December.
  • The U.S. manufacturing and service-sector purchasing managers indices each climbed more than a full point.   
  • Euroland’s composite PMI advanced to a nine-month peak.  The euro area’s economic sentiment index improved 1.3 points last month to a six-month high.  Other sentiment indicators like the Sentix and the German business climate compiled by IFO also improved.
  • In the euro area, sovereign debt market strains continue to subside.
  • The Japanese Nikkei-225, which advanced 11.2% in the final 2012 quarter, continued to move upward on promised more forceful fiscal and monetary support.  That share price index has already risen 2.5% in 2013.  European and U.S. equities also have performed quite well.
  • The latest messages from the Federal Reserve (via FOMC minutes) and European Central Bank (today’s press conference) accentuate the positive view that 2013 will be a better year than 2012.
  • China remains a wild card, but a hard landing of that economy is not thought to be likely.

Since the onset of the financial crisis, the dollar, yen, and Swiss franc have generally thrived when risk-off strategies were employed.  That is not the backdrop, however, that presents itself lately.  Accordingly, dollar/yen has appreciated around 1.5% since the start of the new year, but the dollar has not been well-bid otherwise.  The largest losses (a bit more than 1.5%) among the major relationships this site follows regularly have been at the expense of the New Zealand and Australian dollars, followed by a 0.7% drop against the Canadian dollar.  The euro and Swissie show minuscule net changes, but that’s a lackluster dollar performance for the start of a calendar year.  To wit, the U.S. currency has on average during the past 36 years appreciated 1.1% between end-December and mid-January against the euro and/or D-mark, including a 2.3% advance in 2012.

If the early days of 2013 indeed herald a less strained year ahead, 2013 could see continuing better performances from commodity currencies, the euro, and Swiss francConversely, the yen would be likely to slide, which is the espoused goal of the new LDP government there.  Handicapping currencies is a very humbling activity because of 1) the intrinsic counter-intuitive nature of currency swings, 2) very large growth and political risks that persist, and 3) the small sample of days gone by this year compared to the number left.  That being said, if one starts with the premise that the yen, dollar and Swissie will weaken relative to the euro, yuan and commodity currencies, some round figures come to mind as possible objectives currency values.  These include $1.40 per euro, 95 yen per dollar, and 1.25 francs per euro.  It is not very unreasonable to imagine that the Australian dollar will rise more sharply against its U.S. counterpart than the mere 1.6% net gain notched in 2012. 

The Canadian dollar likewise looks good to exceed its 2012 rise of 2.7% against the greenback.  Canada has much better public finances than the United States and is a big producer of natural gas.  Its financial system isn’t wracked by a lot of strain.  There was surprisingly robust growth in jobs at the end of 2012.

The Swiss franc cross rate, unlike dollar/yen or euro/dollar will change not by market forces but rather as a result of a decision by Swiss monetary officials to shift the franc’s targeted ceiling, which has been 1.20 francs per euro since September 6, 2011.  If the euro strengthens toward $1.40, Swiss officials will be increasingly tempted to prevent the franc from following the euro’s lead in full.

With nearly a whole year’s time remaining in 2013, I’m less bullish about sterling than the euro.  Britain’s Conservative government is playing a risky game of chicken in its policy to modify its relations with fellow members of the EU.  The austerity-now approach also looks deeply flawed, keeping the economy in a zombie state but without meeting deficit-reduction targets as consolation.  The wild card is the planned changing of the guard at the Bank of England in mid-year.  The next BOE Governor, Mark Carney, has a hawkish reputation that can promote currency strength. 

In March, the system of flexible dollar exchange rates will have a 40th birthday.  From those 40 years, only four previous ones have been like 2013 in the following respect.  2013, like 1973, 1985, 1997 and 2005, is the first year of a standing U.S. president’s second term.  Hopefully, Obama will be able to avoid the second term jinx that has plagued U.S. politics especially over the past 100 years but to some degree since the start of the republic.  In the recent past, Nixon resigned after 2-1/2 years, Reagan had the Iran-Contra scandal, Clinton was impeached, and Bush oversaw the Katrina fiasco.  A second term means many changes in the cabinet, and this year, like 1985, brings a new person to Treasury Secretary, the policymaker entrusted with making and enforcing currency policy guidelines.  Within a year of moving from the White House chief of staff to Treasury secretary, the same shift now being asked of Jack Lew, James Baker engineered the historic Plaza Summit Accord that resulted in the halving of the dollar’s value against the mark and yen in less than three years.

The table below presents the dollar’s performance against the mark/euro and yen during 1973, 1985, 1997, and 2005.  The changes represent end-year to end-year movements.

Dollar against Mark or Euro Yen
1973 -15.8% -9.1%
1985 -22.3% -20.7%
1997 +16.7% +12.5%
2005 +14.8% +14.9%

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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