US Data Releases Could Move the Markets

Good day… We had another fairly quiet day in the markets on Tuesday, and it looks like most of the currency desks have already been placed on autopilot. Every year we get a lull in trading activity toward the end of the year, as most of the currency investors square up positions and don’t take large bets at the end of the year. Many of the desks are manned by junior staff while the big bosses head out for their holiday vacations (EverBank WorldMarkets included). But for the first time this week, we will have a pretty good bunch of data releases here in the US, so we could see a bit more action in the markets. With thinner trading volumes, a rogue piece of economic data can have a major impact on the markets.

The morning began with a report that showed mortgage applications in the US fell 18.6% last week. This number was a bit worse than expected, but really won’t move the markets, as no one was expecting a pickup in mortgage applications during the holiday shopping season. The lower number of applications was also blamed on the bad weather, which gripped most of the nation. While the housing market has certainly stabilized, it is still not rebounding fast enough to keep up with all of the inventory hitting the markets via foreclosures.

Later this morning the third quarter GDP numbers will be released for the US. Economists have raised their expectations from 2.5% to 2.8% growth in the past quarter. Personal consumption and the GDP Price Index will be released along with the GDP number. Consumption is thought to be slightly higher and the price index is expected to be flat to previous estimates. All of this data will point to a US economy that is recovering, but not at a pace that will make a major difference in employment anytime soon. This is what continues to worry Ben Bernanke and his compatriots at the Fed. The administration will continue to push Bernanke to try and stimulate the economy enough to bring down unemployment. President Obama has just two years to get people back to work, as out of work voters usually don’t favor the incumbents. But a sub 3% growth rate just won’t get the job done by the 2012 elections, so Bernanke is going to continue to get pressure to goose this economy with any means necessary, no matter what it does to our longer-term prospects.

After the release of the GDP numbers, we will get another look at the housing market. Existing Home Sales and the House Price Index will be released at 9 CST. Existing home sales are predicted to have jumped over 7% in November versus the previous month. But as I stated earlier, the overall number of home sales is still not strong enough to absorb all of the inventory that is being dumped into the markets through foreclosures. This is demonstrated by the House Price Index, which is expected to show another small decline. The housing market was a major driver of employment in the US, and unfortunately I just don’t see new home construction making a strong comeback in 2011.

Boy do I ever sound negative this morning!! I need to move to something a bit more positive. I heard a story on the way into the office that suggested the 2010 holiday shopping season will end up being substantially better than 2009. The story was based on online purchases, which have increased dramatically in 2010. But are shoppers simply replacing spending that they would have done at the brick and mortar stores with purchases online? I haven’t finished my Christmas shopping yet (I’m always a last minute kind of guy) but my few shopping experiences haven’t given me a clear picture of what the 2010 numbers will look like. I walked into a clothing store last night and was one of the only shoppers in the store; but the Best Buy that I went into afterward had a pretty long line. Maybe Chuck will shoot me a note on what the Butler Household Index is showing, as the BHI has had a pretty good record of predicting retail sales.

Speaking of Chuck, he shot me an email late yesterday sharing a thought he had on the Canadian economy, which continues to perform well in spite of the problems facing the US. Here is what Chuck sent me:

I’ve read quite a few stories the past few days about Canadian companies, buying US companies… Toronto Dominion bought Chrysler Financial, Bank of Montreal bought M&I Banking, and so on… These are signs of a strong economy, and a strong currency… Hey! If the euro hadn’t gone to 1.60 a few years ago, Anheuser Busch would still be a St. Louis-based company!

These purchases are all good things for the Canadian companies, but you have to watch the Canadian dollar/loonie (CAD)… For with every one of these mergers & acquisitions, the loonie has to be sold to buy dollars to settle the transaction… Could be one of the reasons the dollar has been “stronger” lately…. But a minor one at that… In the end, though, it just shows to go you that the Canadian banking system is on terra firma, and is strong! And eventually, that supports the loonie!

The Canadian dollar continued to fall versus the US dollar yesterday, and traded near the lowest level in almost 3 weeks. A report, which showed that retail sales increased, was offset by another, which indicated that inflation remains contained. Retail sales in Canada increased 0.8%, beating the consensus estimate of a 0.5% increase. But shortly after this increase was announced, another report showed consumer prices advanced just 2% in November from a year earlier. While this is good news for the Canadians, it isn’t necessarily good news for the Canadian loonie. The lower inflation number relieved pressure on the BOC to raise interest rates and an expected interest rate rise has been forcing the loonie higher. The BOC will next meet on January 18, and the majority of economists now expect them to leave rates on hold until the second quarter of 2011.

One thing that could force the hand of the BOC would be another jump in commodity prices. Crude oil has been rising lately, and the precious metals continue to tick higher. Canada is a major exporter of these commodities, so higher commodity prices typically lead to a stronger Canadian dollar. But for now, the Canadian dollar has been trading lower, and is actually the worst performing currency versus the US dollar over the past week (down 1.21%). As Chuck suggested, there have been a lot of big sales of Canadian dollars with the recent M&A activity, so that is probably at least a small reason for this sell-off.

The recent jump in oil prices has pushed the Russian ruble (RUB) higher. The ruble is now trading at a 3-1/2 month high versus the euro, and has been moving higher versus the US dollar for the last 30 days. Crude oil is Russia’s chief export earner, so the rise in oil prices is directly reflected in the ruble. Apparently the Russians are enjoying a very strong holiday shopping season, which is also helping boost the ruble.

All of the emerging market currencies enjoyed a pretty good day yesterday, as the “risk” trades seemed to be put back on. Investors are looking for a positive GDP report here in the US, and that good news for the US has traders gaining confidence in the prospects for a continued global recovery. A stronger US economy is definitely good news for Mexico, which depends on the US for a majority of their exports. The indications of a continued recovery (albeit slow) in the US has economists raising forecasts for growth in Mexico. The Mexican peso (MXN) was one of the top performers versus the US dollar over the past week, as both Goldman Sachs and RBC raised growth forecasts for the Mexican economy. Higher crude prices, and a stronger US economy will help the peso, but any pause in US growth could cause a reversal of the peso’s recent strength. I still think there are better opportunities for those looking to invest in the “emerging markets.”

The Aussie dollar (AUD) is a favorite of investors who are looking for higher yields, and benefited from this renewed confidence. The Aussie dollar also got help from a report that showed the index of leading indicators in Australia increased 0.3% in October. The Australian dollar is again knocking on the door of parity with the US dollar… But we have seen some major resistance at this level, so I wouldn’t expect to see a dramatic jump in the value of the Aussie dollar without some help from the RBA. I believe it will take a rate increase by the Reserve Bank of Australia to push the Aussie dollar above parity with the greenback.

The New Zealand dollar (NZD) has not enjoyed the same rally as their kissing cousin across the Tasman. The kiwi weakened against most of its trading partners after a report showed that New Zealand’s current-account deficit widened after exports declined. Recent data suggests Central Bank Governor Don Bollard will keep rates on hold, which is not good news for the kiwi, which typically attracts investors due to their yield differentials.

A higher current account deficit is also causing some investors to shy away from the highflying Brazilian real (BRL). Foreign investors are paring bullish bets on the Brazilian real at the fastest pace in seven months after a report showed that Brazil’s current-account deficit swelled to a record. The current-account deficit shows that Brazil is being hurt by their tremendous success. Investors have flocked into the currency, increasing the value of the real, which has driven consumption. This increase in imports and investments has ballooned Brazil’s current account deficit. But on the flipside, Brazil continues to be one of the largest suppliers of commodities to the world, and the increase in the value of the real should help reduce inflationary pressures within Brazil. While the growing current account deficit worries me, I still feel the real is a good long-term speculation… (I use the term speculation on purpose, as any investment in this emerging market must be viewed as a speculation!).

The best performing currency versus the US dollar over the past few days hasn’t been a “high yielder”… But the Swiss franc (CHF) is up about 1.5% versus the US dollar over the past 5 days. It shows you how stable these currency markets have been when the best performer is up only 1.5% in 5 days! The Swiss franc has benefited from a shift out of the euro as the Sovereign debt crisis in Europe continues. The Swiss currency is still a favorite “safe haven” for investors, even when the risks are based on the European continent. Long-term charts illustrate why investors like the Swiss franc, as it has been one of the most stable returners over the very long term, and even yields in Switzerland are typically below those available in the broader markets.

Another traditional “safe haven” investment is gold, which saw another small rally yesterday, adding another couple of dollars to its price. The volatility in the precious metals markets has decreased along with the volatility in the currency markets. The $30 to $40 swings in the price of gold, which were almost a daily occurrence in the past couple of months, have been reduced to “just” single-digit moves. This decrease in volatility is a good sign, as it typically shows that the metal is establishing a new base right around the $1,400 level. As with the currency markets, I wouldn’t expect to see any major positions being put on from now until the end of the year, so hopefully the volatility of the past few months is behind us.

To recap, US data to be released today will probably show an increase in third quarter GDP, the Canadian loonie continues to fall as rates are expected to stay on hold. Emerging market currencies enjoyed a decent day as “risk trades” were put back on. The Aussie dollar gained, but the kiwi fell as New Zealand’s current account deficit widened. Both gold and Swiss francs continue to attract investors as a traditional safe haven investment.

Chris Gaffney
for The Daily Reckoning