US Dollar Slightly Stronger on G-20 Meeting Expectations
The volatility we’ve seen for the better part of the week carried over into Thursday, but we didn’t have the big swings like Tuesday and Wednesday.
As I left you yesterday morning, the dollar index was down slightly and most currencies were still seeing the carry over effect from the collective appreciation of Wednesday, but things started to turn as we made our way into late morning and into the afternoon. It looks as though, at least from what I could tell, there were two drivers behind the dollar strength yesterday. It started with the data releases that showed some slight improvement, but more importantly, they didn’t disappoint.
Chuck said several times that the market has become comfortably numb to the paltry economic numbers and any sustainment is viewed as a positive. In other words, as long as the reports hold steady and don’t show any additional weakness, it’s as good as a win. It’s kind of like playing a game and being content with a tie… What’s the point of playing?
The other force behind the dollar was the G-20 meeting this weekend and the uncertainty surrounding its outcome. Traders have a tendency to get all worked up before these meetings on the off chance something actually gets accomplished or the tough issues actually get addressed. These meetings don’t usually amount to much but I guess its better to be safe than sorry if any type of collective agreement arises.
Currency traders seem a bit sensitive and risk averse as an official from a G-20 country said global finance ministers are planning to say members will refrain from competitive undervaluation of currencies to alleviate trade tensions. The official also said they want a more market determined exchange rate system that minimizes adverse effects of excess volatility and disorderly movements in exchange rates.
At the same time, we have Geithner saying he’s trying to persuade leaders that the US isn’t trying to weaken the dollar. We also had Brazil’s Finance Minister claiming he had a telephone conversation with Geithner about seeking an agreement at the G-20 to prevent the dollar from depreciating. I just don’t understand how proclamations of a strong dollar, or at least one that isn’t weakening, can even be discussed at a time when the Fed is talking about adding QE. Unless I’m looking at this completely wrong, when the supply of something rises, typically the price will fall.
So if the Fed is going to create all of this money and try to introduce more inflation, both of which would debase a currency, I just don’t see how the Fed can say with a straight face that they want a strong dollar. Again, this just sounds like another attempt at creative intervention where the Fed isn’t directly intervening in the currency market but the known effects would accomplish the same goal. If the G-20 is going to bang on China for keeping its currency weak, the US can’t appear to be in a position of pro-weakness, so I guess the games begin, or maybe I should say continue.
Looking at the data releases from yesterday, they did come in as expected with the initial claims falling to 452K from last weeks revised figure of 475K and continuing claims coming in a bit better from last week’s revision. As I mentioned yesterday, we still remain above 450K so gains in employment are still hard to come by. We do have the holiday hiring season fast approaching so we could see some improvement but we need all these companies reporting higher-than-expected earnings to convert part time jobs into full time positions in order to get consumers spending. Employers need to feel more comfortable about the economy first, so it seems like a never-ending circle.
Leading indicators came in right as expected, which was a third straight gain, but didn’t provide much in the way of excitement going forward as it’s not growing fast enough to create jobs. While some of the components have shown some brightness, employment and housing are keeping the figure from gaining any type of traction. The Philly Fed Index also showed some improvement in September as factory payrolls slightly ticked upward. The anticipated QE measures may provide some macroeconomic support, but there hasn’t been much discussion as to its trickle down effect, if any, that would give support to where it’s actually needed on the front lines.
Moving on to currencies, it was another day for the dollar as the only currency to hang on to any type of gain was the Singapore dollar (SGD). The Brazilian real (BRL) saw another round of selling as it was the worst performing currency, barely beating out New Zealand (NZD), by falling just over 1%. One of the most important traits, if not the most important, for the rise of the real is the interest rate story.
Brazil’s central bank met yesterday and kept rates on hold at 10.75%. Many economists aren’t looking for policymakers to resume tightening until next year as we have a Presidential election at the end of the month and any increase or hints of an imminent hike could offset the taxes and other restrictive measures recently implemented. Inflation isn’t at a point that sets off any alarms, but if it does become uncomfortable, they don’t have any problems raising in non-conventional increments.
New Zealand was right down there with Brazil as consumer confidence fell to a 14-month low in October. The biggest contributor to its fall was an increase of a sales tax that made some consumer goods more expensive. As the consumer outlook on spending fell, there was increased optimism on individual finances as well as the outlook on the economy as a whole. The central bank governor said he expects domestic demand to recover as consumer confidence picks up and the labor market improves.
The pound sterling (GBP) has been under selling pressures lately as well, and when I left last night, it was trying to stay above the 1.56 handle. The latest cloud hovering over the pound was an unexpected drop in September retail sales for a second month. Consumer spending may have trouble proving economic support as a reduction in public spending is expected to sacrifice a good number of jobs and higher taxes eat away at disposable income.
Mortgage approvals fell to their lowest level in 17 months and inflation remains above the 3% target, so the BOE is in a tough position as they can’t exactly raise interest rates given the current state of the economy. With that being said, it’s becoming more and more likely of additional expansionary measures such as additional QE. The British economy is basically in the same boat as the US in that policymakers are running out of options to keep the ship afloat.
The euro (EUR) fared better than most of the currencies by only getting hit with a 0.25% loss on the day and retaining the 1.39 figure as I walked out for the evening. It was supported, in part, by better-than-expected manufacturing numbers and adds to the idea that Europe can remain competitive with exchange rates at that psychological level of 1.40. We also had the German government estimate its year-end growth rate to come in at 3.4%, which would be the highest since 1991, as exports to China have been on the rise and export markets outside of Europe become more viable. I also saw where Deutsche Bank raised it euro outlook to 1.45 by year-end citing the US dollar outlook as clearly negative.
Rounding out the currencies for today, we saw China’s economy grow 9.6%, which was more than the expected 9.5%, and September inflation rise 3.6%. The third quarter GDP figure was the smallest increase over the past year, but this won’t keep others from calling on increased appreciation of their currency. While many have ruled out another rate hike for the rest of this year, it looks increasingly likely that we’ll see another hike in the first quarter. It’s going to be interesting to see if there will be a full court press against the Chinese at the G-20 meeting.
Gold and silver have seen some of their luster fade away as gold fell about $20 down to $1,325 and silver trading down to $23.17 on the day yesterday. Part of that can be blamed on a stronger dollar causing a general sell-off in many commodities but the stock market may have pulled some money away as well. The Dow Jones rose to its September 2008 highs so its possible some investors are pulling out profits and looking toward equities, but I think a general round of profit taking is healthy as it gives those who feel it’s gone too far and too fast a chance to join in. Again, with all of the uncertainty out there, gold functions as that uncertainty hedge.
As I came in this morning, there wasn’t much movement at all so things for the most part were as I left them last night. There is a bias toward a stronger dollar so far this morning and without any economic numbers to look at today, the market is likely to remain focused on the G-20 meeting over the weekend and the QE talk that we have seen over the past few weeks. It appears this will be another day for the dollar as traders square up positions heading into the weekend so look for the general stronger dollar tendency of yesterday to continue into today.
To recap… The dollar progressively strengthened yesterday as economic data did not disappoint and the G-20 meeting has traders feeling a little uneasy. Brazil kept rates unchanged, with the next hike not likely until next year, so we saw it sell off yesterday. British retail sales disappoint and is just another roadblock thrown in front of the recovery. The euro was supported by better-than-expected manufacturing numbers. Both gold and silver had a rough day…