Today’s FX View from IB:
The dollar remains on an uptrend [today] despite disappointment surrounding earlier third quarter GDP data showing that the economy rebounded less vigorously than was first expected. Nevertheless consumer spending didn’t fail in that same regard and as the dust clears the tendency towards higher yields continues to underpin the dollar heading towards year end. The only major doing better than the greenback is the Canadian dollar, which had been sheltered from rising yields on the prevalent view that the Bank of Canada meant what it said about maintaining a lax monetary stance through the first half of next year. Today’s U.S. report is insufficient to derail the entire growth recovery story and both North American units are pressing home that point as investors position for future yield.
Euro – Moody’s Investor Services was the third to cut the sovereign debt rating of Greece today and in the event provided some relief and much-needed party cheer. The relief came in the form of a single-notch downgrade, meaning that the worst fate for Greek debt appears to have been avoided. Investors feared that Greek paper would no longer remain acceptable as collateral at the ECB. European stock markets continued a rampage lifting them to the best level since October 2008. The single currency failed to take any respite from either event nor did investors rally around it after ECB member, Juergen Stark reflected that the rate of growth across the Eurozone reached a nadir during the fourth quarter.
U.S. dollar – The third quarter growth data showed a 2.2% pace of growth and fell short of the 2.8% expectation. But a bigger fear out of the report might have been any sign that the consumer remained sickly, but the expected 2.9% pace of personal consumption was only just missed by one-tenth and leaves a straw of optimism in the wind. Later data showed a sharp 7.4% rise in existing home sales, which encourages investors wanting to see firmer evidence that government programs are supporting consumption. It would appear they are and as such the stock market is enticing fresh investors to pay fresh highs to get in on the rally. The S&P 500 index is within an inch of a 2009 high.
The lack of disappointment in the GDP report is possibly based on the growing view that both the final and first quarter statistics will rebound. Bonds failure to show despair today on the back of the data is confirmation of this and lends credence to the dollar rally. The dollar continues to blow the dust off the euro and reached a new high today as it’s trading at $1.4270.
Aussie dollar – All eyes appear to be off the Aussie unit and firmly fixed on the prospects for the U.S. dollar at present. The Aussie dollar is off once again today and has fallen all the way back to 87 U.S. cents. Gold’s price fell in due course and crude oil is down after an OPEC meeting concluded that output will remain at its current level. Although commodity-rich Australia is growing nicely and has a neat 3.5% yield cushion above the greenback, the market is done with it for now it would seem and is looking for the next currency to undergo capital appreciation.
Japanese yen – The dollar rose against the yen to ¥91.76 while the both the euro and pound also gained against it. Yen weakness finally shook the Japanese stock market back to life as it joined the global stock market rally. Former Ministry of Finance official and forex heavyweight Eisuke Sakakibara predicts that the yen will strengthen to around ¥80 by the end of the first quarter of 2010 causing stock market losses and fostering deflation. Earlier in December he noted that MoF would be less effective by using currency market intervention to stem the strength of the yen. On today’s performance, however, his words fell on deaf ears or else this is indeed a story for next year when the euphoria has died down.
British pound – The pound is once again wilting against the dollar at $1.5966 after British GDP showed a marginally larger economic contraction of 0.2% in the third quarter. The government previously reported shrinkage of half that amount. The RICS also predicts that the Bank of England will begin retracting easy monetary policy late next year, which on top of more homes coming to the market and rising unemployment will cause home price gains to stagnate. Home prices in Britain peaked in October 2007 and after a 2.7% recovery in the year to October prices have fallen by 13% from the top. RICS expects a 2010 pace of housing price gains to range between 1-2%.
Canadian dollar – While the fortunes of the Canadian dollar are arguably rooted in the fate of commodity prices, investors are currently firmly focused on the prospects for a resumption of growth and what that might mean for yields. Today the Canadian dollar is again higher at 94.41 U.S. cents as investors question whether the Bank of Canada might be stretching the story a little thin having promised low interest rates through at least June of 2010. Its assumption that anemic growth accompanied by low inflation will remain the status quo is facing a growing challenge and one that’s supporting the Canadian dollar by its affinity with its largest trading partner of the U.S. dollar economy.
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.