Confident Investors Move Dollar Lower

Investors headed back into the currency markets Friday feeling more confident in the global recovery, after US GDP for the fourth quarter of 2009 held at 5.6%. The combination of good US growth, a possible solution to the Greek debt crisis, and the passage of Obama’s healthcare overhaul had investors almost giddy as they put money back to work in the markets.

As was the pattern most of last year, confidence in the global recovery is bad news for the US dollar and Japanese yen (JPY). Investors seek out these ‘safe haven’ currencies during market uncertainty, and reverse these positions as they become more confident. The GDP numbers, which confirmed that growth during the fourth quarter surged higher here in the US, gave investors some confidence. A Commerce Department report also showed that corporate earnings in the US increased 8% in the same quarter, capping the biggest YOY gain in 25 years. Higher earnings may lead corporations to start hiring, which the US economy desperately needs in order to maintain its still-shaky recovery. A separate report showed US consumers were more confident, as the U of Mich. Confidence numbers increased to 73.6 for the March reading.

We start the week off with a bang as we will see Personal Income, Spending and the PCE Inflation numbers released first thing this morning. Both income and spending are expected to have risen in February, with spending outpacing income again. While economists will be excited to see the US consumers spending again, the numbers should give rise to concern. After all, isn’t spending above our means what helped to put us into this mess? I know it is popular to ‘blame the bankers’ for lending too much money to consumers who couldn’t afford to pay it back. But much of the blame lays with consumers who borrowed and spent, living way above their means. Now it looks like things are starting to return to normal again, but ‘normal’ is not sustainable; consumers can’t continue to spend more than they take in. The move toward a higher savings rate here in the US has to be maintained; it is the only way we will be able to pull ourselves out of this mess in the long term. But most economists and the ‘stock jockeys’ who they work for aren’t interested in the long term; they want to see us go right back to where we were two or three years ago, and higher consumer spending is just what they believe will take us there.

Tomorrow will bring us more news on consumer confidence here in the US, along with the S&P Case Shiller home price index. Factory orders and the Chicago Purchasing numbers will be released on Wednesday. Thursday, April 1st, will bring us the weekly jobless claims along with the Vehicle numbers and ISM Manufacturing data. Finally, we will end the week with the big employment numbers for the month of March. It will be interesting to see if the big GDP push and jump in corporate earnings had any positive impact on the labor market this month. A pretty full week of data facing investors.

But now back to the currency markets. The euro (EUR) rose from a 10-month low on Friday, rising over 1% versus the US dollar before giving back some of its gains in early European trading. Investors covered short positions versus the euro after the newest rescue plan was announced on Thursday. The plan, which seems to have everyone’s backing, has the IMF serving as a first line of credit to Greece with the EU serving as a backstop. The chance of a Greek default fell dramatically after the plan was announced, according to the CDS market. While the EU is not totally out of trouble, investors seem to be happy with the plan and have at least called a truce in their assault on the euro.

The top performing currencies over the weekend have been the commodity countries of Australia, Norway, New Zealand and Canada. The Aussie dollar (AUD) was the biggest mover versus the US dollar with a 1.13% move higher. Reserve Bank of Australia Governor Glenn Stevens helped push the Aussie dollar higher as he voiced the need to move rates higher to contain inflation. A report on Australia retail sales for the month of February is scheduled to be released on Wednesday, and many are expecting it to show a 0.3% rise after a 1.2% increase the prior month. Stevens continues to prepare the markets for a rate increase by the RBA. “It’s not wise to leave interest rates right down at rock bottom any longer than you need,” Stevens said. “It would be not doing people any favors to have a prolonged period of very low rates and then hammer them unexpectedly.” The RBA next meets on April 6th and is expected to bump rates 0.25% higher.

Stevens increased borrowing costs earlier this month, the fourth increase in five meetings, in part to contain rising house prices. Aussie house prices surged 11.8% last year, and the bubble has yet to be popped. And Stevens is keeping a very keen eye on prices, and will adjust interest rates in order to cool their rise.

The kiwi (NZD) also had a pretty good week, and is one of the only currencies that shows a gain versus the US dollar over the past five days. The New Zealand trade surplus widened in February thanks to strong demand from China. The Chinese overtook the US as New Zealand’s second largest trading partner last month (their kissin’ cousins across the Tasman – Australia – is their largest market). Shipments to China surged 37% in the year ended February 28, with milk powder, wood, and wool leading the increase. Last week’s data showed that fourth quarter GDP increased 0.4% YOY versus a 1.4% drop in the previous quarter. This was the fastest pace of growth in two years as consumer spending, manufacturing, and house construction all increased.

Reserve bank Governor Alan Bollard said earlier this month that he expects to raise the benchmark interest rate from a record low as early as June. The kiwi has lagged the performance of both the Canadian dollar (CAD) and Australian dollars so far this year, so it has some ground to make up. A strong commodity market and continued growth in China should help propel the kiwi higher.

The weaker US dollar gave a boost to gold prices over the weekend. Gold traded back above the $1,100 handle after hitting a five-week low last week. Demand continues to be strong for the physical metal, with much of the buying coming from Asia. A report issued by the World Gold Council predicted China’s gold consumption would double in the next decade. “China has an insatiable appetite for gold, which looks likely to continue in an environment where domestic mine supply lags behind demand,” the council said in the report. Silver was up even more, appreciating over 2% in the past trading day. We continue to see strong demand for both metals in our Metal Select unallocated accounts, which is, in my opinion, the most efficient way to hold the physical metal.


Chris Gaffney
for The Daily Reckoning