Asian Markets Not Worried About Goldman

We have had two very different trading sessions in the past 24 hours, with the dollar benefiting from continued worries about Greece and Goldman Sachs in yesterday’s US trading session; but Asia saw things a bit differently and started moving money back into ‘risk’ assets. Early trading in Europe mirrors the moves in Asia, so the dollar is heading lower as I turn on the screens this morning.

Only one piece of data was released yesterday here in the US, with the Leading Economic Indicators index climbing 1.4% – the most in 10 months. The index beat economists’ estimates, and February’s figure was revised up to 0.4%. This data indicated the US economy is on track to continue to recover, but the markets seemed to just ignore this data as they focused on the lawsuit against Goldman Sachs.

I stirred up a bit of controversy yesterday with my comments regarding Goldman Sachs. I guess I wasn’t clear enough on which side of the fence I come down on with regard to Goldman. I wrote that the SEC would probably have a hard time getting a conviction; I didn’t mean to insinuate that I thought Goldman was innocent, or that I thought they had done nothing wrong. In fact, I remember calling Goldman greedy manipulators (hardly a glowing compliment). It certainly looks as if Goldman committed fraud in building a security that was designed to fail and then selling it to investors without letting those investors know.

The Goldman story continued to capture headlines yesterday morning, and that, combined with continued questions over the Greek crisis pushed investors back into the safe havens of the yen (JPY) and dollars. When I turned the screens off and headed home last night, the dollar had strengthened versus all but a few of the major currencies, and gold was down a couple of bucks.

But the Asian markets decided the Goldman story really wasn’t going to impact the global recovery. And while the dramatic drop in Goldman’s stock price may have been tough on Wall Street and US stocks, growth in Asia and India really wasn’t affected. Commodity prices began to move higher, and accelerated upward after Australia’s central bank said they had moved rates higher at the last meeting due to a mining boom, which they feared, would push inflation higher. The Australian dollar (AUD) surged in overnight trading, and is the top performer versus the dollar in the past 24 hours, increasing about 0.8%. The news from the RBA caused traders to increase bets that another hike will occur in May, especially if the inflation data due out in a week shows that Aussie consumer prices gained in the final quarter of 2009.

The Asian markets were also kind to the Canadian dollar (CAD), which rebounded from near a three week low against the greenback. The increase in commodity prices along with increased expectations of an interest rate increase pushed the loonie back toward parity with the US dollar. The Bank of Canada is widely expected to hold interest rates stable at their meeting later today, but the markets are looking for a clue as to the timing of their next move. BOC Governor Mark Carney signaled last month that he would likely be raising rates in June in order to fight increasing inflation. The central bank will release its monetary report Friday, and traders will be looking for a more hawkish tone. Economic data continue to show the Canadian economy is probably outpacing the US, and the prices of their main exports are rising. Higher commodity prices and strong economic growth should push Canada up at a faster pace than US interest rates, making the Canadian dollar a better investment alternative. May’s Review & Focus, which Chuck put to bed last night, has a long article on the Canadian dollar, a long-time favorite of the desk.

India’s central bank moved rates higher for a second time in a month and ordered higher bank reserves to try and tame inflation. The Reserve Bank of India increased their main interest rates 0.25% which was in line with economists’ expectations. The accompanying statement described India’s inflation as ‘worrisome’ with structural shortages in the economy keeping prices elevated. India has the third largest economy in Asia, following Japan and China; and their growth rate will be 8% according to the official statement. Growth is expected to accelerate this year, and with inflation running at 9.9%, interest rates will likely continue to rise. The next meeting of the central bank is not scheduled until July 27th, so the markets will have a while to digest this latest move. As long as the Indian government stays away from currency intervention, high growth rates and increasing interest rates will push the value of the rupee (INR) higher.

The dollar rout continued in Europe this morning after German investor confidence jumped in April, beating economists’ forecasts. Investor confidence rose to 53 from 44.5 in March, the first increase in seven months. Economic growth in Europe’s largest economy seems to be gathering steam, and investors have temporarily pushed aside worries over Greece’s fiscal crisis. The Greek crisis has actually helped the German economy, with the 11% drop of the euro versus the US dollar since late November giving German exports a boost. The jump in business confidence follows a better than expected employment report and other reports which indicate growth in both the manufacturing and service sectors.

The Icelandic volcanic explosions, and the ash cloud that they have spewed over Northern Europe continue to hamper European travel. The economic impact of the volcanic ash is a ‘hot’ topic on currency desks; and next month’s data will probably be at least partially impacted. The euro (EUR) just doesn’t seem to be able to catch a break, but it has held remarkably stable with all of the negative factors that have been weighing on it. The strong numbers out of Germany should continue to put a floor under the euro.

Sweden’s krona (SEK) was the second best performer versus the US dollar overnight as traders priced in additional rate increases. Sweden’s central bank, the Riksbank, is expected to keep interest rates stable at their meeting tomorrow. The focus of the currency markets will be on the accompanying statement which is predicted to indicate the Riksbank will be more aggressive with future interest rate moves. The fist move by the Riksbank is probably going to come in July, but higher inflation could force an earlier move. Sweden has been the best performing of all of the ‘Northern European’ currencies, outpacing both the Danish and Norwegian krone over the past three months. While Norway continues to be our favorite call, Sweden may be a good choice for diversification in the European area.

Chris Gaffney
for The Daily Reckoning