Manufacturing continues to surprise...
Good day…Data released yesterday continues to show US manufacturing is rebounding from its recent slowdown. Factory orders for the month of March were up 3.1%, well above the 2.2% level predicted by economists. Last months figures were also revised up from 1% to 1.4%. This data follows Tuesday’s ISM Manufacturing reading which also surprised the markets on the upside. Even the poor US automobile industry saw a slight pick up with domestic vehicle sales coming in slightly above estimates. This data enabled the dollar to continue its recent rebound as many traders are again discounting any need for the FOMC to cut rates and many predict the Fed will need to raise rates.
In an email late last night, Chuck brought to may attention one piece of data which was largely overlooked by the markets. The employment tracking firm, Challenger & Gray’s latest report shows that layoff announcements rose 18.4% YOY in April. We will get a better picture of the employment situation with the weekly jobs report today and the monthly data which will be released tomorrow. If the housing industry is as slow as expected during the next few months, the employment picture will only get worse. The Fed will have their hands tied and will not be able to raise interest rates to combat inflation for fear of further slowing the economy. So all eyes are now focused on tomorrow’s monthly jobs report.
Before I go on, I want to take a step back and look at the trading patterns which we have been establishing over the past few weeks. With very few exceptions, the currencies have been trading in a rather tight range over the last two weeks. Some of our investors have been calling the desk worried that the dollars fall is over and looking to move their currency investments back into dollars. Chuck has always preached that a profit isn’t a profit until you take it, so I don’t argue with taking some profits back off the table, but this range trading is actually signaling the ability for the currencies to move higher.
During the first three weeks of April the dollar fell dramatically with the Euro, Pound, Aussie$ and Kiwi hitting record highs. These currencies bounced off of these highs and moved back down, only to move back up and test the records. This pattern has been repeated 4 or 5 times in the past weeks. Most investors are worried about purchasing something which is trading at all time highs, but the overall desire to own the asset remains. So any time we get a little pull back investors are there to purchase the currency and run it right back up to test the highs again. Each time the currencies have been run up, they have moved ever so slightly through their previous highs. This is what we call ‘establishing a base’ and can take several weeks to work through. It takes a while for everyone, including currency traders, to get comfortable with the currencies trading at or near all time highs (a $2 pound or $1.37 euro).
But the economic fundamentals continue to point toward a falling dollar. Eventually investors will get comfortable and the currencies will move out of these ranges and start to appreciate again. This new move up will be sparked by something the markets will latch on to such as an interest rate decision/non-decision by the FOMC or some piece of data which surprises everyone. Suddenly traders will have a V8 moment and the focus of the market will return to the underlying fundamentals which show the dollar should be valued well below its current level.
Enough of that, let me review what happened in the currency markets during the past 24 hours. The European Commission said prospects for economic growth in the euro region this year are “more favorable” than for many years, driven by investment and consumer spending as well as exports. “Domestic demand is an important driver of economic growth in the euro area,” as reflected by the “continued buoyancy of investment spending and the revival in household spending” the EU said in a report released this morning. “Euro area exports are well placed to continue their strong performance.” So the Euro is set to continue to benefit from strong economic fundamentals. As Chuck points out in this months Review and Focus, instead of just saying one should buy the euro because it is the offset currency to the dollar, we can say that the Eurozone’s economic growth is strong as well!
Risk aversion toward emerging markets waned after the Turkish government took actions aimed at easing tensions with the military. So the best performing currencies yesterday were the high yielders including the Brazilian real, South African rand, and Mexican peso. With a move back toward risk, the carry trade continued to be put on. The Japanese yen fell as investors sold yen to invest in both the higher yielding currencies and also moved money into the US equity markets.
The commodity currencies continued to perform well with the Canadian dollar strengthening to an eight month high. The Canadian dollar has gained six straight weeks, the longest rally since 2003, boosted by a 26 percent rebound in crude oil prices since mid-January. Commodities account for about 54 percent of Canadian exports. The recent strength in the commodity prices will allow Canada’s central bank to increase interest rates later this year while the US Fed will have to stay on hold. This is good news for the loonie.
Asian finance ministers announced they are looking to create a pool of reserves to help members in times of crisis. The new pooled foreign-exchange holdings will help decrease their country’s dependence on the IMF which attached conditions to loan packages used to bail out these countries during the Asian currency crisis ten years ago. This is just another indication of how this region continues to ‘feel their oats’ as they become a major player in the financial markets. Finance ministers from China, South Korea, and Japan will gather for a meeting tomorrow, before getting together with their counterparts for the 10 member Association of Southeast Asian Nations a day later. Another item which will undoubtedly be on the agenda: creating a single monetary unit similar to the euro to reduce costs of doing business between the region’s countries. While I have got to believe a single Asian currency is still far off, it again illustrates the shift in the economic power of the world. The Euro has taken much of the economic clout away from the US$, and a single Asian currency would just continue this move away from the dollar. We will continue to keep an eye on this developing situation.
Currencies today: A$.8257, kiwi .7391, C$ .9027, euro 1.3607, sterling 1.9925, Swiss .8260, ISK 63.66, rand 6.9748, krone 5.9679, SEK 6.7232, forint 181.32, zloty 2.7614, koruna 20.6701, yen 120.07, baht 32.09, sing 1.5238, HKD 7.8210, INR 41.0975, China 7.7021, pesos 10.9127, dollar index 81.67, Silver $13.33, and Gold $675.85
That’s it for today… The Cardinals took another one on the chin yesterday and have to travel to MS today for the funeral of their teammate. I sure hope they can get their heads straightened out again and start winning! Another rainy day in St. Louis with more rain predicted for tomorrow. Hope everyone has a great Thursday!!
Chris Gaffney — May 03, 2007