Traders left their desks Friday all bulled up over Monday's line-up, which was set to include an address by Treasury Secretary, Timothy Geithner in which a resolution for the nation's ailing banks would be revealed. The rise in unemployment to 7.6% spurred investors into the belief that politicians of all colors would come together to expedite the passage of the financial stimulus package through the Senate. And President Obama has now commandeered the television cameras in his first address to the nation for Monday evening. The postponement of Mr. Geithner's plans until Tuesday doesn't instill confidence that whatever his team's plan delivers will be much more than a compromise in addressing the warehouse of toxic assets that have chained the bank's balance sheets to the bedrock of the river just as the spring thaw arrives.
Traders responded by selling stocks Monday, partly in response to binge-buying in light of the payroll number last week. However, they have also commenced the week by selling the dollar against the euro. Earlier the Japanese yen was buoyed after data showed a worsening domestic economic picture. Machine orders slipped for the third consecutive month, while the huge drop in exports caused a large narrowing of the trade surplus. The yen had earlier declined against the dollar to ¥92.50 but was edging higher against all other units. However, the apparent turnaround in risk appetite has seen both dollar and yen fall from favor in the first hours of trading in New York.
We can only think that investors are biting their fingernails ahead of the after hours speech from President Obama just in case his words of wisdom inspire economic confidence. Having to wait one more day for the package from Mr. Geithner also hinders dollar bulls where whatever he has to say stands more chance of receiving a warm reception as the media pores over it. Remember that markets always focus on vogue topics, which accounts for countless stock market rallies despite the fact we are still mired in a big, bad and very ugly bear market. It is such daily hope and aspirations that tends to create all of the market gyrations that we all value so much. Without them, there would be no reason to form an opinion and certainly nothing to report about.
For now, it looks like the market wants to give a great big "thumbs up" to more bad news, while failing to believe that ever-bigger government will fail in its efforts to deliver the economy back into growth mode. The reality of bankruptcy for GM and Chrysler only months ago helped hammer the equity markets and bolster the dollar. Today, the resumption of such discussion is seen as an orderly solution and a necessary step to getting back to normal. As such, there appears to be more appeal for the story that argues that the dollar will weaken when the government has created a deficit larger than Texas and there is no single government around the world capable of growing an appetite to buy up all of that debt. Never before have the prospects for the dollar been this diametrically opposed based upon the reception to whatever solution the government patches together.
The euro is now trading comfortably at $1.3055 and is higher by more than a penny today. Meanwhile the dollar is also weaker against the Swiss franc, again by a penny at $1.1535. The pound continues to rally beneath the radar and is close to $1.50 today following weekend reports in the media that the Bank of England may note this week in its Quarterly Inflation Report that inflation may not undershoot its target range by as much as once feared now that time has elapsed and that interest rates have been cut aggressively. The impact would presumably be that there would be less need to either ease policy from 1% or act quantitatively through direct corporate or bill purchases. It seems as though the market is treating the pound with some reverence these days or at least can't find reason to treat it like an unruly schoolboy any more.
More investors seem to be concluding that the Canadian dollar is on a one-way train at present and that the ultimate destination will be south. While the Canadians might match the policy responses from the U.S., they can't stop the currency from behaving like its wingman. It is actually hard to see how the Canadian dollar can break this trend given its proximity to the United States. There has to be a meaningful spurt of growth to get the Candians out of this rut through the commodity route, and that's just not happening anytime soon. Today the unit has rallied as the greenback takes it from all sides and is trading higher at $1.2206.
The currency market's fear-gauge seems to be showing that investors expect less erratic currency market movements going forward. Almost across the board we've seen declines in option implied volatility as investors think that the major realignment might have run its course. We'll have to await midweek to get beyond the first reactions to whatever is said this week. Once the words have dried and the debate begins, investors will be forced to concentrate on the here and now of real economic data, which isn't going to stop the rut anytime soon.
