It has been exceedingly gradual, but the dollar has been drifting downwards over the past two weeks. Not that we are talking about a big move mind you – the dollar index is down by roughly 1.5% over that time. That said, some of the major dollar crosses are at levels not witnessed for some time – cable for instance reached a 7mth high at just under 1.63 overnight.
Indeed, the pound has been something of a revelation so far this year, despite the fact that the economy is apparently back in recession. Clearly sterling is attracting flows from a number of different sources. Just imagine how well the currency might be doing if the economy was actually registering the kind of growth that America is experiencing. Video:
The Japanese yen is also faring quite well, after a torrid period in February and the first half of March. Even the beleaguered Aussie has perked up, despite mounting speculation that the RBA will cut rates by 50bp by mid-year. All things considered, it has been an indifferent first four months of the year for the dollar, which is slightly surprising as the economy looks better than most, corporate earnings are healthy and the Fed has backed away from implementing further QE after Operation Twist finishes next month.
Guest post by Forex Broker FxPro
Part of the explanation is that there has been a slight improvement in risk appetite recently. For now, some of the high-beta currencies such as the Kiwi and the ZAR are attracting interest, while sterling retains a very healthy bid.
Commentary
Should Spain be spared? Spain was again the focus on Friday. One has to wonder about the efficiency of markets when we see both currencies and bonds react negatively to S&P’s announcement that it has cut the rating by two notches, to BBB+. Of course, some investors may be tied to ratings in their investment mandate, so a degree of reaction is understandable. However most of the statement told us what any casual observer of the Spanish situation should have known already, namely that the “budget trajectory will likely deteriorate against a background of economic contraction”, together with the fact that the government “will need to provide further support to the banking sector”. The latter should have been pretty apparent from the recent data on bad loans (rising over the 8% level), together with declining house prices. As we’ve said before, the sovereign situation in Spain is a by-product of what’s happening in the banking sector and the massive deleveraging that is required. Adding to the pessimism surrounding Spain was the news that the unemployment rate had jumped to 24.4%, with youth unemployment now over 50%. It’s a crippling situation for the economy, with the government quite hamstrung in its ability to implement measures that will effectively deal with the situation. Naturally, measures to increase labour market-flexibility are going to be strongly opposed by those still in employment who will feel even less secure and will spend less as a result. There are no easy options, which is one reason why it’s that much easier to carry out such reforms during times of growth (as Germany did ten years ago) than in periods of low growth or even recession. In the past few years, it’s been pretty hard to find somewhere that has suffered property-type bubbles (e.g. US, Ireland and Hungary) where banks have managed to tough it out on their own and ultimately it’s hard to see how Spain could be the exception to the rule.
Dutch government secures budget agreement. After arduous talks with Geert Wilders’ Freedom Party, the caretaker government of Mark Rutte has managed to secure an agreement with the opposition that aims to reduce the budget deficit to 3% next year. Some of the measures in the package include a hike in the rate of VAT from 19% to 21%, a doubling of the bank tax, and an alteration to mortgage financing. Civil servants’ salaries remain frozen. The Netherlands is due to submit a budget package to Brussels today.
Jordan defends franc ceiling. In a detailed defence of its continuing commitment to prevent EUR/CHF from trading through 1.20, new President Thomas Jordan proclaimed on Friday that the SNB’s determination was unwavering and that the strength of the currency remained a ‘major challenge’ for the economy. Jordan described the currency ceiling as an extreme measure, and vowed that the SNB would take further measures should the economic outlook worsen or the threat of deflation intensify. Interestingly, although the Swiss economy is once again experiencing deflation, the economy appears to be withstanding the overvalued currency reasonably well. Indeed, the SNB expect the economy to grow by 1% this year. Should the Swiss economy remain resilient over the course of this year, and Europe sink further into the mire, then traders are likely to retest the resolve of the SNB later in the year.
Germany tramples on ESM direct-lending proposal. One proposal which has been circulating amongst European policy-makers this week would permit private banks in Europe to borrow directly from either the EFSF or the ESM. However, Europe’s financial gatekeeper, Germany, has scuppered the idea before too much discussion has taken place. Government spokesman Steffen Seibert pronounced on Friday that Germany considered it to be the “wrong approach”. Separately, some government officials asserted that no negotiations were taking place on this idea. It might be a novel proposal, but the chance of implementation is very low.
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