Goodbye to a Thought-Provoking Summer
August 29, 2013
Dollar movements against the yen, euro, Swiss franc, and sterling between the U.S. Memorial Day and Labor Day weekends were no greater than 3.0%. In each of the instances, the dollar lost ground. Although it did well in the final week of summer, it seems premature to characterize such gains as anything more than noise. Over the intra-holiday summer season, the dollar rose about 2% against the Canadian dollar, roughly 4% versus the New Zealand dollar, and by some 8% relative to the Australian currency. These changes seem more meaningful, both because they are each commodity-sensitive monies and given strong efforts by monetary officials in those countries to signal their opinion that their currencies were overvalued. The Chinese yuan rose less than 0.3%, underscoring the preference of Beijing leadership for currency stability except when pressed hard to promote appreciation.
The summer of 2013’s currency market story belonged to several emerging market currencies, including those of Indonesia, Turkey, India, Brazil and South Africa. Each sold off sharply, depressed by a expectations that Fed policy is going to become less accommodative and the exodus caused by such speculation in hot money investments that flowed into these economies in the post-Great Recession years. In common, the above five economies have significant current account deficits. To stay healthy, all those economies thus rely on on appealing to foreign capital.
In contrast to the sharp upswing of U.S. and European long-term interest rates this summer, currency watching among the currencies of highly developed economies was generally unremarkable. The period will be better remembered for a number of philosophical and academic debates.
The unusually public debate over the merits of people on President Obama’s short list of Fed Chairperson nominees not only revealed highly partisan views about the potential candidates but a diversity of opinion over what skills will be most required. At this writing, Larry Summers is rumored to be the front-runner. Summers enjoys verbal combat, and I can’t really think of a predecessor who fit that mold.
Staying with a combat motif, a separate topic of great discussion was raised by the upheavals in Egypt and Syria, and how the United States government should respond, if at all. Americans are exhausted with paying taxes to finance military operations overseas. One is hard-pressed to find a U.S. involvement in military conflict since World War II that achieved what could years later be seen as unambiguously constructive results that outweighed the heavy collateral costs and which involved the national interest in a way that could not be ignored. World War II was the last and only war to be decided by weapons of mass destruction, and maybe that correlation with the last time something was settled definitively by war is no coincidence.
The pursuit of Edward Snowden also provoke lots of discussion in the summer of 2013. Is he a whistle-blowing hero and eye-opening public enabler or a scandalous traitor? Is the spying by an elected government any worse than private-sector spying facilitated by high-tech companies? The latter are motivated by profits, while a government of the people, by the people and for the people is entrusted in the preamble to the Constitution to “provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” Against world terrorism, how is Washington to respond if not by the use of covert intelligence? If everything that is done for the American public must become public, might not the mission of the Constitution be undermined, but if Federal officials a la Jay Edgar Hoover assume a carte blanche to undertake secret spying with impunity, might not the “Blessings of Liberty” be rendered meaningless even if intermediate goals are met? Like the debate over when to use military force, the issues raised by Snowden’s revelations of spying are very complicated.
Closer to the minds of foreign exchange market participants was the issue of relative fundamentals in comparisons of the United States, Europe, and Japan. Revised U.S. 2Q GDP data doubled the growth rate to 2.5%, and labor statistics show grinding improvement from the standpoint of layoffs and net jobs created. That’s the story of today’s snapshot, but the question still unanswered is whether the U.S. economic upswing can handle the significant tightening of monetary conditions during the summer. The long-term U.S. economic problems could be solved if the politics would allow, but that’s not going to happen without a shock. If anything, the dream of bipartisanship looks more elusive now than in late May, and another debt crisis looms in October. As for Europe, Ezone and U.K. data are on a better track. The long-term structural fundamentals, however, are worse, and smart investment money correctly doubts that Germany’s election next month will unleash the reforms that so far have been delayed. Japan has a more unified and functional political situation at the moment than the United States or Europe, but its public finances are the worst among the three. All developed economies will have a more difficult time navigating policy waters in the autumn because of the newly sluggish demand in so many emerging markets and the upward march of long-term interest rates.
That’s the summer that was. There were no breakthroughs in the currency pairs that are most important to the world economy. Sexier stuff is happening in world of emerging market currencies, and so far the two universes haven’t morphed into one.
Copyright 2013, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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