We made a note in yesterday's column that traders appeared willing to buy commodity dollars pinning their hopes on a stimulus package that would lighten the weight of the yoke on the shoulders of the global economy. However, the Canadian dollar is weaker against its southern neighbor this morning following the surge in unemployment from 6.6% to 7.2%. The economy lost 129,000 jobs as unemployment rose to its highest reading in four years. Meanwhile the third consecutive reading of in excess of half a million lobs lost in the U.S. economy sent the rate to 7.6% as 598,000 unfortunate workers were handed pink slips. The dollar has lost an earlier bout of strength against the euro and is now lower at $1.2860 as traders digest today's raft of data.
Still judging by the fact that bond priced are now lower and equity index futures still signal a positive opening to Friday's session, one has to conclude that the market is becoming used to such numbers. Over the last couple of months, the stock market has rallied in the face of these huge readings possibly in response to the safe knowledge that the government must and will come running to the rescue.
But one must stay focused on the plight of Australia versus Canada. The Aussie is building a head of steam as it pushes 66 U.S. cents today on optimism that commodity demand will return should the U.S. engine of growth finally turn over and spur a global rebound. Contrast that to the performance of America's neighbors. The Mexican central bank finally intervened to fulfill dollar demand and buy pesos during the week as the unit reached extreme weakness for fear of the knock-on impact of weakening U.S. demand and the gentle rise in inflation, which is a by-product of a weakening peso. The Canadian dollar too at $1.2520 doesn't appear to have much confidence on any imminent spending package. You'd think that an Aussie rally would be either dependent on or at least inspired by confidence in the future health of those economies bordering the heart of the problem.
The big winner this week is the British pound, which continues to defy gravity and is punching holes in the stratosphere once again this morning. It has gained against the dollar where is has visited $1.4750 this morning, and at 87.34 against the euro it has rallied from 95.00 at the start of last week. Earlier in January the pound was struggling dangerously close to parity with the euro while economists sharpened their pencils and revised their expectations for ongoing weakness. One could say that, while the pound has a yield disadvantage beneath the euro, it has a credibility advantage lent to it by the actions of the Bank of England who cut rates to 1% this week. Investors appear to be rewarding that move with an increase in confidence for the prospects of the improving health of the economy.
Although the dollar is weakening against the euro following the number today, we can see a clear trend out of those units that have been traditionally used to shelter from troubled times. The Japanese yen is at its weakest versus the dollar in around one month. Today the dollar buys ¥91.57. The Swiss is at its weakest versus the dollar since the U.S. unit fell off an Alpine peak in mid-December when risk aversion picked up. Euro/yen, which bottomed at ¥112.09 in January as feared escalated is fast approaching ¥118.00 today.
What the markets are collectively telling us is that as this bad situation gathers momentum, there is an increased sense of need to act, which while straight-forward enough is hardly a recipe for a rescue plan. In other words investors can imagine what the light at the end of the tunnel looks like, because they've watched it on television incessantly and can't pick up a newspaper without reading about the copious amount of dollars that needs to be spent on a solution.
Careful how you go though. The pork-barreling and positioning in the Senate might be delaying the stimulus plan. What no one knows right now is how successful it will be. The market senses a victory, but may be premature in rewarding risk appetite just yet.