Movement in the dollar has an Alice-in-Wonderland feeling. Bad economic news ratchets up risk aversion, lifting the dollar counter-intuitively. It is hard to ignore instinct, as anyone who tries to steer into a skid quickly learns. Here's another peculiarity: although risk aversion favors the yen, the dollar at 16:10 GMT today showed identical gains for the week of 1.1% against the yen and euro.
Commodity currencies were big losers this week and for the month of January. That included the South African rand in spite of pricier gold. The dollar advanced more than 5.0% against the Australian and New Zealand dollars this week and over 10% against them during January. Russia's rouble was clobbered this month as well. The New Zealand benchmark interest rate was slashed by 150 basis points for the second month in a row, and Australia's cash rate is likely to get cut by another 100 basis points next week. Commodities are one of the first pressure points in a world recession, and commodity-intensive economies are getting hammered by this erosion as well as weaker-than-anticipated demand from China and other emerging markets. At peak, New Zealand and Australia had the OECD's higher central bank rates, so their interest rates are now falling the most with resultant pressure on their currencies.
The Canadian dollar has been more resilient than other commodity-sensitive currencies, losing 0.4% over the week and 1.7% in the month against its U.S. counterpart. Political risk associated with Canada's currency ebbed after Stephen Harper's minority government survived a scare by delivering more fiscal stimulus than it had intended initially. The Canadian dollar also had undergone a major downward adjustment prior to this year. It was among the first to peak after reaching 0.9061 per USD in November 2007 and ended 2008 over 25% below its cyclical high.
The seasoned currency trader knows that past movement gives no assurance of continuing trend. An intensifying recession in Canada could yet depress the affectionately-called loonie more decisively in February, and other commodity currencies might acquire greater buoyancy after their recent steep declines. Foreign exchange markets are notorious for trampling over consensus opinion. The curious case of sterling is the latest example. Two weeks ago, market chatter found the pound to be extremely vulnerable. Talk became rampant a week later that the pound would soon break parity against the euro and eventually maybe against the dollar as well. There seemed to be an endless number of bad sterling factors. Banks were headed for nationalization. British house prices seemed poised for a bigger peak-to-trough drop than in the United States. The twin external and public-sector deficits look out of control. Projected growth is even worse than elsewhere in the G-7. But a funny thing happened on the way to par with the euro. Sterling posted this week's best performance, rising over 6% against the common European currency and more than 4.5% against the dollar. Sterling remains below its end-2008 level against the dollar, but the year-to-date loss is no longer eye-catching.
With the hindsight of a full month, the euro has emerged as the weakest link among major currencies with losses of 9.2% against the yen, 8.4% against the dollar and 7.2% relative to the sterling so far in January. One might think European officials would welcome the euro's softer tone and the benefit such might lend export competitiveness. On the contrary, unnamed European sources report that the Europeans hope to use the February 14th meeting of G-7 finance ministers and central bankers to sound out the Obama Administration about enhanced FX policy cooperation in hopes of flattening the euro's wide swings in recent months. Currency market volatility per se in these times of severe world recession and great uncertainty becomes part of the problem, not part of the solution, even if the euro's net movement appears constructive. These reports are unlikely to produce any effective action. Short of coordinated intervention, there is not much governments can do to influence foreign exchange. The Swiss franc almost fell as much as the euro, but it performed robustly this past week, as did gold. When gold soared in the 1970's, the Swiss franc was the currency that came closest to keeping pace.
Volatility also makes life difficult for currency analysts, traders, and multinational corporations. Every day is a new chapter in the market, and the element of noise can drown out a sense of continuity. One helpful device for times such as these is to identify centers of gravity, levels toward which key currency pairs keep returning. Ninety yen per dollar seems an obvious one, and EUR/USD 1.30 may prove to be a newfound pivot point. In successive weeks to December 19th, 26th and January 2nd, the midpoint for the high-low range on EUR/USD printed at $1.4044, $1.4013, and $1.4101. Markets find comfort in round numbers, and $1.40 acted like an equilibrium over the yearend cusp. The stability evaporated early this month, with high-low midpoints of $1.3637 in the week to January 9th and $1.3252 in the following week through the 16th. The mid-points in the final two weeks of the month of $1.3076 and then $1.3061, in contrast, suggest the formation of a new gravity center. February will tell if this was just a consolidating pause within a trend of euro depreciation or a more enduring fresh equilibrium. One final psychological level that bears watching is $1.50 per pound. It was after cable (which is what traders call the sterling/dollar pair) fell below $1.50 that the sterling really took on a stigmatized image. A return of the pound to levels above $1.50 would promote a more basic reassessment of the British currency. Britain's problems are real ones, and I doubt the pound will climb back above that benchmark easily.
Next Week
The first week of February is very light on Japanese data - just the monetary base and index of leading economic indicators - but will comprise at least seven central bank meetings involving Euroland, the U.K., Australia, South Africa, Indonesia, the Czech Republic, Norway and Peru. Only the ECB is not expected to cut interest rates. 100-basis point reductions seem likely in Australia and South Africa, and most of the others will cut by a half percentage point. The Reserve Bank of Australia releases its quarterly Monetary Policy Statement at the end of the week.
U.S. data releases are led by the monthly labor force survey on Friday, where a street consensus looks for the loss of another half million jobs and a further climb in the unemployment rate to 7.4% or 7.5%. An increasing number of analysts expect the latter to eventually crest above 9%. Other U.S. indicators will be the manufacturing and service-sector purchasing manager indices, construction spending, auto sales, pending home sales, factory orders, jobless insurance claims, and productivity and unit wage costs.
Euroland also releases PMI figures (manufacturing, services and composite) as well as retail sales (first Germany, then the whole euro area), and producer prices. German industrial orders and production figures arrive too, as do French trade numbers, and Italian consumer prices.
From Britain, PMI's readings, the Nationwide consumer confidence index, shop prices, industrial output and producer prices are due. Switzerland announces its PMI and unemployment figures. Norway unveils factory output and credit growth.
Canada reports the IVEY-PMI , building permits and monthly labor figures. Australian figures for trade, building approvals, and retail sales figures are scheduled for release, and so too are the PMI-mf'g index, the service sector index, and a leading index of inflation. New Zealand unemployment arrives as well.
Larry Greenberg CurrencyThoughts
