Currency Traders Don't Trust the Global Recovery
The currency traders were working overtime this weekend, continuing the dollar’s move upward as concern over the stability of the global recovery moved back into the forefront of investors’ minds. The dollar moved higher on Friday as reports showed Europe’s economy is struggling to hold onto its nascent recovery. As we have pointed out several times in the past, Europe’s economy is dominated by Germany, and a gauge of German business confidence caused the latest round of concern. The Ifo’s business climate index fell to 101.4 from 102.3 in August. Economists had predicted an increase in the reading to 102.5, so the fall was unexpected.
Adding to concerns on the European recovery was a public clash between German Chancellor Angela Merkel and French President Francois Hollande. The leaders of Europe’s two largest economies argued over the timetable to introduce joint oversight over euro-area banks. French President Hollande wants to move forward with a eurozone banking union “the earlier, the better,” while Merkel would rather move a bit more cautiously.
Merkel seems to be losing patience with her fellow leaders, as she called out Spain’s Prime Minister Mariano Rajoy this weekend. Merkel wants Rajoy to decide whether or not he will seek a rescue. Most believe Spain is stalling on the decision to ask for aid, as they do not want to have to deal with the austerity requirements that will certainly accompany the aid. As stated after the last ECB meeting, the European Stability Mechanism stands ready with “unlimited” funds to support the Spanish bond market, but any rescue will most certainly come with fairly stringent fiscal constraints. And just the announcement by the ECB of the limitless funding has brought Spanish rates down, so Prime Minister Rajoy is trying to keep from having to ask for help.
Greece continues to try to meet the requirements tied to the release of the next round of rescue funds. According to German magazine Der Spiegel, Greece’s budget deficit is much more than previously estimated, and may be as high as 20 billion euros. The troika of the ECB, EC and IMF continue to press Greece for proof it is making the structural changes to the economy in order to qualify for the next round of funds. The Greek government has rejected Der Spiegel’s numbers, saying the deficit will be substantially lower and will be covered by 2 billion in taxes and another 11.5 billion in spending cuts. The drama certainly looks like it will continue, and you can see why Spain is trying to do everything it can to keep from having to ask for assistance.
All of this uncertainty in Europe had investors selling the euro, which dropped back below the $1.30 handle. The spike in the price of the euro following the ECB meeting earlier this month was dramatic, and these latest moves lower were expected. The euro will continue to be volatile, but according to a report I read over the weekend, if it can hold above the $1.28 level, it will remain in an upward trend.
With all of the concern regarding Europe, the pound sterling (GBP) advanced versus the US dollar as investors sought U.K. assets. The pound moved higher even as global investors sought shelter in the US Treasury market. But this latest rally in the sterling seems fragile, as recent data showed U.K. inflation is easing and retail sales declined last month. Consumer prices in the U.K. rose 2.5% in August, and retail sales fell 0.3% last month, compared with an increase of 3.1% during the same month a year earlier.
Global investors were also spurred to move back into Treasuries and the US dollar as tensions continue to rise in the Middle East. Leaders from Israel and Iran will be traveling to the United Nations in New York to discuss the current situation. Investors always run back to the US dollar and the “liquidity shelter” of Treasuries whenever global uncertainty is increased, but the moves are typically short-lived.
We issued our latest MarketSafe CD over the weekend, and we ended up with a fairly good subscription. I gave a couple of presentations last week, and in speaking to investors, I heard one of the big concerns with our latest Emerging Markets MarketSafe offering was the inclusion of the Israeli shekel. Investors were concerned with the tensions and the possibility of increased hostilities between Israel and Iran. I guess that is why it is a good thing we offered this currency exposure in the form of a MarketSafe CD, as the investor gets exposure to these volatile currencies with no downside exposure. We don’t have another MarketSafe CD in our near-term plans, but I expect Chuck to dream up another sometime after he returns.
China has been the engine of growth for the global economy over the past few years, but data continue to show the Chinese engine is sputtering. The S&P jumped on the slower growth for China bandwagon this morning, lowering their base case forecast for China’s GDP 2012 growth to 7.5%, which is just slightly lower than the “official” estimate of 7.8%. Remember, China’s leaders had set an unofficial lower limit on growth of 8%; anything below this level of activity risks social unrest. So the new Chinese leaders will definitely continue to look for ways to boost growth, including a lowering of interest rates and direct investments into infrastructure projects.
All of the commodity-driven currencies, including the Australian dollar (AUD), Brazilian real (BRL), New Zealand dollar (NZD) and South African rand (ZAR), are driven by Chinese growth expectations. The latest data and renewed talk of a hard landing for the Chinese economy has most of these commodity-based currencies heading lower versus the US dollar.
The Canadian dollar, (CAD) another commodity-based currency, was lower versus the US dollar, as a report showed Canada’s inflation rate unexpectedly slowed. CPI in our neighbor to the north rose 1.2% in August from a year ago, compared with a 1.3% gain in the prior month. Bank of Canada Gov. Mark Carney has kept rates unchanged, but has indicated a willingness to move them higher if the Canadian economy starts to heat up. This latest data hardly indicate an increase is needed in the near term, and the loonie will probably remain under selling pressure.
Then There Was This: I was on a number of planes last week, and while traveling can be tiring, it also gives me a chance to catch up on reading. While thumbing through an old copy of The Economist, I ran across a chart that showed the latest competitiveness ranking from the World Economic Forum. The chart graphed GDP per person on the Y axis and the Global Competitiveness Index on the X axis. Switzerland is the most competitive country, according to the World Economic Forum, followed by Singapore, Sweden and Germany. The country with the highest GDP per person is Qatar, followed by Luxembourg, Norway and Switzerland. It was interesting to see Australia was tied with the UAE for the fifth-most GDP per person. The text accompanying the chart pointed out the striking fall of the United States, which it says has dropped in the rankings for four years in a row. If you get The Economist, you can find the chart on Page 59 of the Sept. 8 edition.
To recap: Investors moved back into the US Treasury market as they sought shelter from the global slowdown. Data out of Europe showed the economy is slowing, and Merkel seems to be losing patience with her fellow leaders as Spain continues to drag its feet regarding the need for a rescue. Greece still hasn’t been able to show it has met requirements for another round of bailout funds, and Der Spiegel suggests the Greek deficits are much larger than being reported. Concerns over tensions between Israel and Iran also contributed to the move by global investors back into the US dollar. And finally, data out of China has caused a resurgence of the hard landing predictions for the Chinese economy. These worries have all of the commodity-based currencies retreating.