Today’s FX View from IB:
As the old saying has it, “As Goes January, So Goes the Rest of the Year.” It would be nice to think that the New Year would be greeted by at least a tad of optimism. Investors typically buy the equity market at the start of January as no one wants to miss out on the act. And after an uncomfortable first quarter, investors spent the second half of the year getting back on their feet despite incessant warnings that the road to recovery would remain a rocky one. You’d think it might be an appropriate time to perhaps crank up the confidence level buy even just a notch. But in his New Year’s message to Great Britain Prime Minister Gordon Brown issued the same message to the nation when he referred to “a still fragile” recovery that “needs to be nurtured.” He told Britons he had a blunt message: “Don’t wreck the recovery.” The pound is fast losing friends into the end of the year.
British pound – The pound is lower against the dollar at $1.5871 having breached $1.6000 just yesterday. Mr. Brown would do well to loosen his necktie and raise a dram to the future of the British economy over hogmanay rather than beating his chest. There are possibly plenty more people who’d rather do that for him. Perhaps he’s still in that mood where he’d rather see a lower pound for the sake of aiding exporters. However, I doubt it after the irritation expressed at a northern newspaper for reporting the Prime Minister’s comments to fit the story.
The blame for investors’ frustration today appears to stem from concerns over a rising budget deficit. This of course is no new story and we all know that the budget deficit at 12% of British gross domestic product is the highest across the Eurozone. Today the yield on comparable 10-year Italian yields fell beneath that of British gilts – a considerable feat considering the legacy of debt that the Italian governments are renowned for. Recent warnings about the prospects for British sovereign debt were brought to the fore when S&P ratings agency lowered its outlook for the nation’s debt.
The pound skillfully managed to shake off those blues and recover its composure. However, now that it faces the year of election in which both main parties look equally undesirable, investors seem happier to find a viable alternative to the pound. Maybe when January trading begins investors will be happier to perceive political risks as priced in to what’s an already undervalued pound. The euro today buys 90.30 pennies.
U.S. dollar – The dollar has spent the early part of the morning continuing yesterday’s recovery. An abrupt late-morning reversal for the dollar’s fortunes left all and sundry looking for a reason. My best excuse remains intact: Thin markets cause exaggerated movements at this time of the year.
The dollar is caught between polemic forces. On one side investors’ ongoing willingness to discount recovery is pushing equity prices ever-higher. Even a pullback today can’t be seen as significant in the face of a break-up in stock prices. Risk appetite is very much back on the table and is a dollar negative. However, the opposing force is that of the impact of growth prospects. As I’ve noted lately, the surge in bond yields across the entire maturity spectrum raises the stakes of a policy shift at the Fed – not because they are dictated to by the market, but because investors sense the lesser need for stimulus.
Later this morning the Chicago purchasing managers’ index, which is expected to ease from three monthly back-to-back gains. It read 56.1 in November and is scheduled to show a marginally less expansionary pace at 55. Such a reading would leave bond traders no reason to sell bonds and equity traders no reason to add to stock holdings. Rather it leaves the dollar in a state of flux until January.
Euro – The euro is a little weaker to the dollar as noted above. Some investors were sharp to judge yesterday’s EC report, which stated that half of the 16 member nations were at risk of running what might become unsustainable budget deficits, as reason to sell the euro. Perhaps this is a story for 2010, but I have my reservations. Having made it thus far with a single currency without becoming derailed, it’s might be rather hard to break the resolve of the core nations. The euro today buys ¥132.37 against a cheaper yen.
Japanese yen –Asian stocks sagged on the final trading day of the year after S&P ratings agency fired a warning shot across the bows of the Japanese fiscal position. Failure to see policy initiatives create a sustainable pickup in economic stability leading to a permanent reduction in debt might result in the loss of Japan’s AA credit rating. The yen remains soggy too and is even weaker to the British pound today.
Aussie dollar – The Aussie is holding up best against the U.S. dollar underpinned by firmer commodities. In particular Asian companies are said to be fixing annual contracts at sharply higher prices than at the end of 2008. With coal and iron ore contracts apparently firming, analysts note that these are Australia’s big bread winners when it comes to exports, which is helping support the Aussie at almost unchanged on the day against the dollar at 89.36 U.S. cents.
Canadian dollar – After a sharp lurch higher when trading started on Tuesday, the loonie lost its luster and fell back on the day. That pattern reasserted itself today and the Canadian dollar buys 95.34 U.S. cents on a data-free run into the end of the year.
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.