Although the U.S. dollar yesterday reached its highest point in several months, investors are more likely to remember days like today when equities rally off bargain basement prices clinging on to any signs of global recovery. There’s a real schism opening up between currency values and central bank action, or in some cases inaction. With no shortage of market bulls creeping out of the woodwork today, the dollar is predictably feeling the pressure and is lower against just about everything.
A catalyst apparent in leading U.S. equities higher is the internal email circulated to Citigroup employees, which states that the bank is having its best days since 2007 and that revenues are stellar. CEO Vikram Pandit notes that the share price, which slumped to less than one dollar last week, doesn’t reflect the earnings potential nor the bank’s capital position. Over the weekend General Electric’s CEO, Jeff Immelt sounded off to Bloomberg journalists in a similar fashion and for now, investors appreciate the confidence from respective leaders.
If the remaining 498 CEO’s wouldn’t mind stepping forward and speaking their minds on shares in their companies we could have a pretty decent rally on our hands before the weekend. And if the Treasury department would reiterate its strong dollar policy and how that benefits America, we could see fresh highs for the dollar too.
The relief for equities is quite apparent and as it asserts itself the dollar is visibly losing its bid, today falling to $1.28 against the euro. Against the yen the dollar is lower at ¥98.25 while the euro has added more than one Japanese yen to ¥125.70.
But here’s our issue with what we see as another round of knee-jerk trading. In Australia overnight the Aussie fell as business confidence stayed pinned to the floor while jobs advertised in the media fell at the fastest ever pace. That in itself doesn’t bode well for the employment report later this week. However, the fact that the Baltic dry index rose for a seventh consecutive day aroused the notion that global export demand was alive and well somewhere. This turned local stocks around and gave a shot in the arm to the Aussie now trading at 64.81 U.S. cents from 63.16 yesterday.
Just around the corner in Japan, things certainly didn’t turn any corners as fresh data showed leading and coincident indicators clearly showing a worsening outlook. These indicators are forward looking and deteriorated – they didn’t even stand still – and it’s hard to understand how both Aussie and Japanese data can coexist with dollar indifference today.
Our follow-on issue today lies in the treatment of the pound relative to the euro in terms of central bank performance and rhetoric. We noted yesterday that the pound was suffering despite a persuasive performance from the Bank of England as it tackles domestic implosion. It has shown preparedness to slash interest rates towards zero and devise quantitative measures beyond what other central banks are doing, save the Fed. Today the pound continues to weaken to 92.21 pennies against the euro following the worst set of housing sales since 1978.
On the one hand currency traders continue to punish the pound for the underperformance of the domestic economy – a legacy borne out of the core over extension of the banking system. At the same time the Australian dollar doesn’t react to similar evidence of domestic weakness, preferring to hang its hat on a rally in an overly depressed shipping index. Further, the words of Germany’s Bundesbank president, Axel Weber today cause us more of a headache. He is know stating that Eurozone interest rates shouldn’t fall below 1% and as such he’s setting a floor in policy expectations. Once again, this is a vital misunderstanding at this rather important central bank, where once again we note that as recently as July they were raising interest rates.
Failure by the ECB to adopt a similar tone to that pursued by the Bank of England will ultimately cause further euro weakness. Today, however, is not that day and the euro is expanding its haven as a relative high-yielder following Weber’s discussion.
What distresses us further today is the fact that the cart appears firmly in front of the horse. It’s very hard to stand in front of an equity-inspired boost to confidence, especially when investors are likely processing data in a skewed fashion. We’re talking about energy prices here, which are helping to fuel demand for commodity dollars including the Canadian dollar today, which has now rebounded off a four-year low and today takes $1.2775 U.S. dollars to buy a Canadian dollar. Rising crude oil prices are helping to instill confidence that a commodity rebound is here. What’s missing here though is the twofold comprehension that OPEC’s supply reduction is working and second, that U.S. consumers’ effective tax holiday is slowly being lifted.
For sure it’s great to feel confident, but it remains a long shot to expect a rebound for equities to create a solution to the weakness of the banking system.