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Weekly Market Commentary

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The US dollar strengthened against all currencies bar none and consensus opinion

Fri, Aug 8 2008, 10:59 GMT
by Nicole Elliott

Mizuho Corporate Bank

Overview

The US dollar strengthened against all currencies bar none and consensus opinion, according the latest Reuters’ FX poll, is that it should continue to do so over the next twelve months (except against the Yen). In other words, that we have already seen the Euro and Cable’s peaks. This is a view that will probably suit many but why the sudden very strong opinions on the matter is surprising. Worst hit has been the New Zealand dollar which fell to $0.6983, closely followed by its Australian counterpart at $0.8890. Partly because of the FX move nearly all commodities traded lower again, the exception the CME’s Lean Hogs contract which set a record high at 87.95 cents per pound with Live Cattle close behind at 102.475. Equity indices were once again trapped in the fairly tight ranges that have held for the last five weeks. Interest rates are tricky and very complex. Treasury yields are generally lower, many below where they have been since May, with the spread between German and UK ones narrowing against US rates. Money market futures have been given a tiny boost by this, but Libor rates are still stuck in the quagmire of the last year.

Political and Economic Developments

In a surprise move the Czech Central Bank cut rates by 25 basis points to 3.50% in order to curb a very strong koruna, despite CPI running at 6.9%. South Korea’s Central Bank raised its key rate by 25 basis points to 5.25% to fight inflation which is running at 5.9% annualised. Meanwhile in the US it is getting difficult to say what exactly inflation is. Core PCE at 2.3% Y/Y, close to its highest since 2000; the PCE Deflator is 4.1% Y/Y, its highest since May 1991. CPI at 5.0% is almost at the higher end of the last quarter of a century; PPI +9.2% annualised and higher than anything since 1981; the Import Price Index is booming at the record rate of 20.5%. Yet at Tuesday’s FOMC meeting only one of eleven Fed Governors voted to increase the Fed Funds target from 2.00%, while the other ten plumped for no change because ‘conditions are likely to weigh on economic growth over the next few quarters’. Facing a similar dilemma the ECB and Bank of England also decided to sit on their hands.
US shoppers are spending some of their tax rebates but Europeans, whose governments have not been so generous, are voting with their feet so that Retail Sales plunged a staggering 3.1% Y/Y. Germany’s June Trade Surplus is at a record €19.7B but even that won’t tempt Mr. and Mrs. Schmidt to splash out; German Retail Sales are still negative over a twelve month period, as has so often been the case since labour reforms started years ago.

Underlying Themes

We hope Beijing hosts a successful summer Olympic Games and that it lives up to their high expectations. The chance to showcase the extraordinary talents of some of its people, as well as the economic advances of the last decade, are to be applauded. But let us not forget that economic development in emerging countries is just one of the many issues that need addressing. Human rights, equality, health, education and justice must not be left to chance.
The Evening Standard’s Anthony Hilton notes: ‘the Bank (of England’s) pension fund has recently sold all its equities, all its property and even disposed of its immature private-equity holdings (and) the whole lot has been reinvested in inflation-linked Gilts.’ Oh ye of little faith (in the MPC)!

What to watch for next week

Sunday Bolivian President Morales and nine regional governors face a national vote to see whether they stay in office. From Monday German July Wholesale Prices, Japan Machine Tool Orders, UK PPI and June Trade Balance. Tuesday early UK BRC July Retail Sales Monitor and RICS House Price Balance, Japan Domestic CGPI and Consumer Confidence, UK CPI, US Monthly Budget Statement and June’s Trade Balance. Wednesday Japan Q2 GDP and June Trade Balance, Eurozone Industrial Production, UK Average Earnings and July Unemployment, the Bank of England’s Quarterly Inflation Report, US July Retail Sales, Import Price Index and June Business Inventories. Thursday Japan June Tertiary Industry Index, July Tokyo Condominium Sales, German and EZ15 Q2 GDP, US and Eurozone July CPI. Friday, Assumption Day holiday in many countries, US June TICS flows, July Industrial Production, August Empire Manufacturing Survey and University of Michigan Confidence.

Positioning and Technical Analysis

Holding patterns in many instruments since March are starting to unravel. We feel that recent US dollar strength is a false steer and should be reversed over the next month or two. In other words, we are in the middle of ‘false breaks’ in some currency charts. Treasury yields are likely to lead the way lower, for equity indices too, and the credit crisis is likely to worsen. As well as banks, now insurance companies and pension funds will start revealing the gremlins in their cupboards. Nobody and nothing is safe, the authorities are not in control, and do not have enough money.

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Published on  Fri, Aug 8 2008, 11:03 GMT