In trading as in life contest is everything. That’s why starting this year we’ve decided to provide you with much greater context when examining fundamental trends from a monthly perspective. We’ve reduced the data points but extended their history to 12 months providing you with as better understanding of the underlying dynamics in the G-1) economies we cover. We hope you like the changes we’ve introduced and invite you top write to us with any suggestions that you may have.
Wishing you the best of trading in 2008
Boris Schlossberg
Senior Strategist
Nothing has weighed more heavily on the greenback than the steady deterioration in interest rates and the month of December offered little solace to dollar bulls as rates declined another 25bp to 4.25%. As we look to the future there appears to be little relief in sight as US rates are expected to be lowered further. One key reason for the dovishness is the sudden drop in job growth as NFP printed a woeful 18K against forecasts of 70K. Even the rising threat of inflation as CPI hovers above 3% is unlikely to deter the Fed from easing as growth concerns take precedence over price pressures. One bright note is that capital flows continue to improve, but if that last bastion of strength disappears there will be little left to support the buck. – BS.
Uber hawkishness from ECB chief Jean Claude Trichet has kept the euro well bid in the month of December and given the fact that CPI data has remained well above the CB 2% target, the EZ monetary officials have reason to worry. But how realistic is the prospect of further rate hikes? Not very. Despite surprisingly strong performance from the region’s producers that has kept the Trade Balance rising, Retail Sales continue to drag to the downside and without a strong consumer demand the ECB will be politically unable to tighten policy further. Yet for the near term none of this may matter to the currency which may continue to rise if US rates continue to fall - BS
Yen continues to trade on risk aversion alone as economic fundamentals provide little hope that Japanese rates stuck at 0.5% will be increased any time in the foreseeable future. The crux of the problem in Japan is the consumer who remains extremely weak. The Eco-Watchers survey reached yet another low dropping far below the 50 boom/bust level while overall household spending contracted yet again. With little disposable income the Japanese consumer is unable to jumpstart the economy which has been solely reliant on exports for growth. Yet even than dynamic may suffer as the Tankan survey declined materially in the face of rising exchange rates. If risk aversion continues USDJPY could well hit 100, but any uptick in global equity markets could push USDJPY back to 110 - BS
Cable has been the weakest of all major currencies against the dollar which in retrospect is surprising given the relatively neutral state of UK economic data. Although evidence of a slowdown is present, it is not dramatic with few signs of complete collapse on the horizon. The one exception has been housing which has seen massive deterioration of values in the past 6 months. Since housing plays such a pivotal role in UK asset values, the markets have raced far ahead of the data, anticipating a series of cuts from the BoE. So far those cuts have not been forthcoming, but pound nevertheless remains vulnerable to any further meltdown in the financial sector, though for the time being the unit appears to be grossly oversold given the present state of the fundamentals. -BS
Despite some weakening during December, the Swiss Franc remains remarkably strong against the US Dollar and Euro amidst a marked demand for flight-to-safety. Meanwhile, economic indicators suggest that while growth in Switzerland is slowing, conditions remain resilient as exports buoy the trade surplus to record highs. Furthermore, with inflation pressures mounting, it’s easy to see why the Swiss National Bank has kept rates steady at 2.75 percent rather than following the Fed’s lead by cutting rates. However, with rising unemployment taking a toll on consumption, the SNB may consider making monetary policy more accommodative in 2008, though traders should keep in mind that risk aversion may remain supportive of Swissie in the near-term. – TB
Given the Canadian Dollar’s sharp appreciation throughout 2007, it’s not very surprising to see that the trade surplus has slowly deflated, as US export demand wanes. Indeed, the demise of the Canadian export sector has been to the detriment of the economy as a whole, and underpins some of the Loonie’s declines in late 2007/early 2008. Naturally, manufacturers have been hit the hardest, which has led Ivey PMI below 50 (signaling contraction) and contributed to major job losses in December. As a result, despite persistent price pressures, the Bank of Canada is expected cut interest rates in January, which should spark additional Loonie losses. – TB
Since falling from its November peak, the Australian dollar has slowly climbed higher as it became clear that the economy was fairly insulated from stormy financial market conditions in other parts of the world. Furthermore, rapid gains in commodities like gold and strong export demand from Asia have led business performance to skyrocket and labor market conditions to tighten as manufacturers work overtime to boost output. If exports are so strong, why has the trade deficit widened? Domestic demand. The improvements in employment have provided a lift to consumption, which leaves the RBA concerned about upside inflation risks and is the primary reason why the bank is expected to raise rates to 7 percent in February. – TB
Similar to the Australian economy, New Zealand has benefited from commodity price gains – primarily dairy products – which have kept business conditions strong. However, conditions are not so bright domestically, as record high interest rates of 8.25 percent have cooled consumption growth, despite the fact that the unemployment rates steadily dropped throughout 2007. Nevertheless, the Reserve Bank of New Zealand remains highly concerned about upside inflation risks, and they are expected keep monetary policy restrictive throughout the first half of 2008, though the Kiwi could be impacted by weakening economic indicators. – TB