Today’s FX View from IB:
The oversize rebound in the value of the British pound this morning indicates the reliance the globe has on U.S. led growth. Third quarter American GDP jumped at a 3.5% pace. Today’s data provided investors with a reason to breathe easier after several sessions in which they fretted about weaker growth ahead despite the fact that just about all S&P component companies are turning in A-plus report cards. The data caused the risk pendulum to reach its maximum extent and on the backstroke has clipped the dollar and yen on the hop. The dollar is down across the board except against the yen.
Analysts had predicted a 3.2% gain, but courtesy of a 3.4% increases in the pace of consumer spending created by a 22% surge in the purchase of durables, growth was far stronger. It’s true to state that the third quarter felt the full impact of stimulus measures. Personal consumption was driven forward by the so-called cash-for-clunkers program and its $4,000 personal tax credit. Meanwhile the rise in residential construction is the first in four years and the largest outright jump in almost a quarter century.
It’s no surprise that the $8,000 tax credit for first-time homebuyers played a large role in reviving the construction market and is the major reason for extending it. But what’s crucial here is whether the 23% gain in construction in today’s report is sustainable. There is surely a finite number of first-time buyers and arguably this relatively small number is being asked single-handedly to stabilize the value of mortgagees real estate. Builders for their part are adding to an inventory overhang for the sake of doing something to create growth and while it makes no sense to devalue such stimulus effort, we conclude that this is better than digging tunnels to nowhere.
Continuing claims for unemployment benefits slipped to the lowest level since March in today’s government report. Still, the fact that initial claims stayed about static in today’s report with a further 530,000 filings raises ongoing challenges for a cash-strapped administration. The need to create lasting employment or at least fertile conditions for labor market stability is likely to be the hurdle into 2010.
The euro has rebounded in the face of today’s growth number rising to $1.4800 against the dollar and ¥135.13 against the Japanese yen. In a domestic release from the German government earlier investors were surprised by a decline in the rate of unemployment in October by one-tenth of a percentage point to 8.1% as 26,000 jobs were added. Analysts were warning of an overall increase in the number of people without work. Currently the euro is on the rise for the first day all week and look set to tussle with short-term resistance at the present level before it can once again use the global recovery theme to launch an assault on $1.50.
As we noted at the start of today’s commentary the British pound forged ahead to above $1.6600 on the back of today’s U.S. growth numbers. One could be forgiven for thinking that the pound kidnapped the GDP data in exchange for its own lousy report of last week indicating a sixth-consecutive quarterly shrinkage that raised alarm bells for the British economy. Mortgage approvals also rose in Britain this month, once again pointing to the sort of anecdotal evidence that MPC member, Adam Posen remarked about last week. The pound is also sitting comfortably against the euro at 89.13 pennies and made strides against the yen to ¥151.50.
The GDP report created reassurance to investors with dyed-in-the-wool hopes for a rally in emerging market currencies. The dollar has this week trampled on those hopes, only to see a sizeable rebound in the Brazilian real and the Mexican peso today. Both have plenty to gain from the improvement in the state of demand in the U.S. Mexico exports 80% of its total to the United States.
That point brings us neatly back to the commodity dollars, which this week have suffered the wrath of the gods. Not only have recovery hopes been stirred up earlier in the week challenging the ascendancy of Australian and Canadian dollars, but officials from the latter have done an excellent job at burning speculators jumping on the carry and trash-dollar trade. The Bank of Canada has gone to quite some lengths to ward off speculators and has openly promised intervention as a policy option given the harm an unnecessarily rising domestic currency has on the performance of Canada’s growth.
A perfect storm for patient Canadian dollar bulls appears to have left a calmer setting in the wake of a series of spiraling losses. The combination of rising global stocks and commodity prices as the dollar falls has improved the outlook today and has investors paying up for 93.29 U.S. cents per Canadian dollar. The Australian dollar has also risen to 91.24 U.S. cents today from a three week low.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.