Investors this week took a tremendous amount of comfort in the words of several heads at key banks, each promising a return to profitability in 2009 and as early as the current quarter. This faith in a the financial system stole the headlines igniting a stock market rally around the globe and allaying the fears of investors growing uncomfortably numb at the prospects of the demise of giants such as General Electric. The about-turn in investor sentiment is in danger of undermining the severity of the downturn, evident in practically every economic data point during the week. The dollar goes out a loser as investors ditch risk aversion for risk appetite in hopes that rising commodity prices signal better times ahead.
One thing we learn from trading is that you can’t fight the trend. Tuesday’s big rally was blamed on a short-squeeze with market-makers clamoring to fill orders at any price in huge blocks. Once the banking system got the hang of how to fuel a rally by throwing investors a bone, the rally was self-fuelling. The dollar ignored rising unemployment around the globe. In fact we read one story earlier in the week noting that the dollar’s daily decline that day was due to a rethink on last week’s non-farm payroll number and that it had not been that bad. Try telling that to the 15,000 crowd at a job convention in Atlanta this week as they sought contacts in hopes of employment.
Both the Canadian and Australian dollars are higher at the end of the week despite increasing labor-market weakness. This morning Canada’s government data announced the loss of another 82,600 jobs in February after 129,000 went in January. That leaves the rate at 7.7%. We’re not quite sure how we see rising revenues at Citigroup or JPMorgan Chase impacting lumberjacks up north, nor copper miners down under. But the nature of lagging data, such as unemployment readings, plays second fiddle to leading indicators such as stock market indices. As a result the Canadian dollar has rejected this week’s four-year low against the U.S. dollar above $1.30 and has strengthened to its best price in more than two weeks at $1.2690. The four-year high in Australian joblessness has also been traded in for the preference of stock-watching as its dollar challenges a one-month high at 65.75 U.S. pennies today.
We’re not suggesting that those two governments are happy to see currency strength at this time. Indeed if the tea leaves are predicting a turning point for global trade we’re pretty sure they’ll welcome the pick-up in their local dollars as a healthy barometer reading.
Such an embrace is hardly what we heard yesterday out of the Swiss who started selling, or announced that they had been selling Swiss francs. Its value plunged against the single currency of the surrounding Eurozone by the most in any week in the decade-long history of the euro. The Swiss National Bank’s action marks the first time since 1992, again during recession, that the bank has embarked on a solo-mission to prevent a rising currency inflicting internal pain via the damage to its exporting companies.
Faced with a 3% contraction of growth throughout 2009 and possibly more signs of deflation rather than inflation, domestic corporate suffering illuminates the impact of currency strength. Exports are suffering and manufacturing has contracted at its fastest pace since 1995, which has resulted in the rise in unemployment to a two-year high.
Once again the linkage between possible U.S. banking profitability, despite the health of its collective balance sheet, and the state of the Swiss export sector eludes us. For sure we understand that stimulation of lending needs to occur before corporations and consumers can take a step forward. This week’s equity rally has taken the pressure off companies facing the wrath of shareholders and provided a comfort blanket to consumers who don’t need to watch the demise of their savings and investment plans anymore.
As noted earlier, you can’t buck the trend and it’s going to take a whole new round of data to inspire the greenback to find its feet. Overnight the Chinese Premier, Wen Jibao warned the U.S. at a press conference to safeguard his nation’s vested interest in this economy by ensuring that it can honor its obligations and that the U.S. government doesn’t lose its debt rating status.
We’re not sure that this warning has had much impact on treasury debt prices and yields are still bordered by a 2.8 to 3.0% range in yield. What we should anticipate, however, is that yields will continue to break to a higher range if the stock market continues to go up. In the same way, the supply reductions by OPEC, which have successfully helped raise crude oil prices, will act to further weaken U.S. consumption in the weeks ahead as the effective consumer tax cut is slowly taken away.
Next week will be of interest to see how much faith forex traders place in the role of stock market gains as a flashing indicator for future growth. In the mean time our tongue-in-cheek target at $1.30 for the dollar against the euro is almost in the bag as investors warm to growing recovery talk despite the scantest of evidence.