Good day. The dollar fell against many of the higher-yielding currencies yesterday following a speech by Fed Chairman Bernanke, which the markets interpreted as signaling Fed policies will remain accommodative for some time. Investors have been linking the more-positive U.S. data, including a steadily improving labor market, with concern that the Fed’s policymakers would have to retract their January statement that U.S. monetary policy would remain “exceptionally accommodative.”
We have heard a chorus of Federal Reserve presidents warn the markets that the positive data we have been seeing here in the U.S. could be temporary. Both New York Fed President William Dudley and Chicago Fed President Charles Evans have been saying that a more accommodative policy would be appropriate, given the current rate of unemployment.
Even Bernanke warned Congress last week that higher gas prices could cause a temporary slowdown in the pace of our nascent recovery. But traders didn’t seem to be getting the message, and still worried that the Fed would have to pull back some of the liquidity that the markets have become addicted to. So Bernanke got back to work today and tried to calm the market’s worries.
Bernanke credited both the unusually warm weather and a reversal of large layoffs, which occurred back in 2008 and 2009, for the recent drop in unemployment. Neither of these items are structural changes to the U.S. economy, so these gains, in Bernanke’s opinion, are probably not sustainable. Reducing the jobless rate further will probably require a quicker expansion of business production and consumer demand, which “can be supported by continued accommodative policies,” according to Bernanke.
Not exactly a resounding call for additional stimulus or a guarantee of QE3, but the markets were desperate for a bit of reassurance that the FOMC wouldn’t be yanking the needle out of their arm, and Bernanke’s words were just enough. The stock market rallied over 1%, and commodities, which are linked to global growth prospects, also rallied.
Bernanke also suggested there is not much wage pressure, suggesting the Fed is still not worried about one of the major components of inflation. He did point out that the Fed must continue to be worried about commodity prices. But concerns over employment seem to be outweighing any concerns over inflation in the new “dual mandate” Fed. Others on the Fed are warning against another round of easing. Atlanta’s Dennis Lockhart said last week that the improving U.S. economy is reducing the need for additional easing. And St. Louis Fed President James Bullard, whom Chuck and I got to hear speak a few months ago, warned about “overcommitment to ultra-easy monetary policy.” Leave it to a Midwestern Fed head to speak with a bit of reason. It truly worries me how addicted these equity markets have become to a steady flow of low cost liquidity.
The data released here in the U.S. yesterday continued to indicate the recovery in housing will be choppy, as pending home sales fell 0.5% month over month but were up almost 14% when compared with sales a year ago. The month-over-month change was well below economists’ projections of a 1% increase, but the total number of existing homes sold during the month of February was still near a two-year high.
Other data released showed activity in the Chicago area was reported slightly lower during February, and a different report by the Dallas Fed showed manufacturing in that region was also down. The two Fed reports seem to support Chairman Bernanke’s suggestion that the U.S. economy is continuing to sputter along, and could need another shot of liquidity this year. The piece of data that everyone is waiting on this morning is the U.S. consumer confidence number, which is expected to have held steady at a 70.1 reading (the February reading was 70.8).
The euro (EUR) got a boost versus the U.S. dollar as Germany suggested it might back plans to increase the debt-crisis rescue funds. The euro rose to a one-month high versus the U.S. dollar after Chancellor Angela Merkel said she would back plans for the temporary and permanent euro-area rescue funds to run in parallel. EU finance ministers will meet again on March 30 to discuss additional steps needed to support the member countries.
By the way, just how much money do you think the EU ministers have spent on travel, dinners and meetings since this debt crisis began? And shouldn’t they at least be holding these meetings in some of the weaker countries in order to pump a few extra euros into the local economies? Meeting in Luxembourg or Copenhagen really doesn’t do much for the local Greek economy. The euro also got a boost from a report that showed French consumer confidence unexpectedly rose in March to an eight-month high. Sentiment jumped to 87 in March from a reading of 82 in February, according to the data released this morning in Paris.
A report written by technical traders over at UBS suggests the euro may advance to its strongest level this month after breaching a major resistance level just below $1.33. The analysts had to stop out their recent short trades after the euro surged higher yesterday, and these same technical traders are now looking for the euro to climb to $1.3359, and possibly $1.3489, in the near term. The euro surged to its highest level during the month of March yesterday, as investors regained confidence and Bernanke’s words pushed the global stock markets higher.
Now on to a currency that I don’t really cover much in the Pfennig: the Hungarian forint. Hungary’s central bank is predicted to leave their benchmark rate, the highest in the EU, unchanged during their meeting today. Prime Minister Viktor Orban has requested bailout funds from the EU and the IMF, but neither organization has responded to the requests. Without these funds, Hungary’s central bank needs to keep rates high in order to attract foreign capital.
Most currency analysts believe if and when Hungary gets some funding, rates will be headed lower. The forint is one of the best performers versus the U.S. dollar this year, appreciating 10.95% versus a 10.99% appreciation by the Polish zloty, which is the best-performing currency against the greenback.
Swiss Economy Minister Johann Schneider-Ammann said the central bank should maintain the limit on the Swiss franc (CHF) versus the euro in order to give Swiss export companies a more-stable business environment. The Swiss franc has been appreciating versus the U.S. dollar alongside the euro, but the Swiss National Bank has maintained its link to the common currency. In an interview yesterday, Schneider-Ammann said, “The minimum exchange rate set by the SNB at 1.20 SFR/EUR gives some safety in planning. Companies are building on that; they’re making their budgets and investment plans based on it.”
The Japanese yen (JPY) continued its slide and is the worst-performing currency of 2012, dropping over 7% versus the U.S. dollar. The yen declined yesterday as investors regained enough confidence to place funds back into the carry trades. The best-performing carry trade has been the combination of a sale of Japanese yen versus the purchase of Mexican pesos (MXN). This trade would have paid over 17% to investors on currency movement alone during the first quarter of 2012.
Commodities also rallied yesterday, as the markets looked to the Fed chairman for additional support. Gold was up over 1% before, and silver was also up nicely. Gold is knocking on the $1,700 door again after passing through this level back on March 13, and silver is back above $33.
The Australian (AUD) and New Zealand dollars (NZD) both benefitted from the combination of a commodity rally and a surge in “carry trade” investments. Both the Aussie and kiwi are popular choices of investors looking to benefit from interest rate differentials, and renewed confidence in the global recovery has also helped these two currencies.
The Canadian dollar (CAD) finally got to ride on the “commodity currency rally train” yesterday, as Bernanke’s speech lifted global growth expectations. The push past $107 in crude oil prices helped propel the Canadian dollar to the best day it has had since March 8. But the loonie’s rally is over this morning, as investors are less convinced the Bank of Canada will be raising rates as early as December. Recent data suggest inflation and economic growth will moderate in the coming months, causing bond investors to cut back expectations that the central bank will raise interest rates.
One item that could cause a pause in this commodity rally was the release of a leading index for China, which rose at a slower pace in February. This is further evidence that Premier Wen Jiabao’s policies to tap on the brakes of the Chinese economy are working.
The gauge gained 0.8% from the previous month, which compares with a 1.5% gain in January. Wen continues to fine-tune economic policies in an attempt to sustain growth, while deflating the asset bubbles that had appeared in the property markets. So far, he and his economic advisers seem to be successfully traversing the dangerous path from unsustainable double-digit growth to their respectable but more-sustainable goal of 7.5% growth. While the currency had fallen at the beginning of the month, the renminbi (CNY) seems to be firmly back to a slow but steady appreciation.
Then there was this… I will share another improvement our new core computer system will bring with it next week. Investors who use EverBank for their metals purchases will finally be able to make these purchases through the Online Financial Center. No matter if you want to purchase unallocated gold, silver or platinum — or if you want to purchase specific coins or bars — you will now be able to place your order without picking up the phone and calling the trade desk. And yes, we will be increasing our offering of precious metals to include platinum, which has outperformed both gold and silver over the first quarter of 2012. These improvements will be available beginning next week, with the introduction of our new core banking system.
To recap… The Federal Reserve chairman used another of his many tools to boost the economy, his jawbone. In a speech yesterday, Bernanke suggested interest rates would remain low for some time, in spite of the recent upswing in U.S. data. The euro surged higher on the back of the equity market’s moves, and Merkel comments that Germany would back a plan to increase the EU bailout plan. The Hungarian forint will stay strong, as their central bank is predicted to keep rates unchanged, and the Swiss economic minister says the SFR peg to the EUR will remain. The Japanese yen slid, adding to its position as the worst-performing currency in 2012, and the commodity currencies rallied with the global equity markets. Finally, I discussed a report out of China, which says the Chinese economy is continuing to slow.
Chuck Butlerfor The Daily Reckoning
Chris Gaffney is vice president of EverBank World Markets and the alternate author of the popular Daily Pfenning newsletter. Mr. Gaffney has been involved in the global marketplace since 1987, and is director of sales for EverBank World Markets. The Daily Pfennig is delivered via e-mail to tens of thousands of market watchers globally, providing commentary that allows them to stay on top of economic, currency, and market happenings. He is a Chartered Financial Analyst and holds degrees in accounting and finance from Washington University in St. Louis.
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