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Tuesday April 14, 2009 - 06:42:50 GMT
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The Return of Normal?
The Return of Normal?
Last Thursday the American equities had an excellent day. The three major
averages rose more than 3.0% capping a five week rally that has been
the sharpest since 1933. Wells Fargo, the large California bank, was
the catalyst as it reported much better than expected first quarter
earnings. But the entire financial sector participated, as speculation
followed the Wells Fargo report and a press story that all major US
banks will pass the Treasury Departmentâ€™s â€˜stress testsâ€™ that the
financial slump may be ending.
Nothing unusual here, good economic news produces
an equities rally. And it is not really news that banks can earn a
strong positive carry on their main businesses with Fed Funds at 0.25%.
The unusual event is that the currencies played along. The dollar rose
modestly, 1.3% against the euro and 0.8% versus the yen.
But not very long ago positive US economic news or
a stock market rally might have produced a weaker dollar as traders
kept their focus on the US currencyâ€™s risk aversion status. The fear
and deleveraging mania of last fall gave the market the peculiar twist
that only bad financial and economic news brought out the avid dollar
buyers. When the news was good the dollar was either becalmed or
shorted on the reversion of safe haven trades.
There has been a slow subsidence of fear from all
the financial markets. Few analysts are expecting the extreme
volatility of September and October to return. There is plenty of
remaining economic worry but it has turned to the mundane questions of
GDP growth, tax policy and the political attributes of the Obama
administrationâ€™s stimulus package. The apocalyptical events of last
fall are gone.
With the need for a haven currency ebbing traders
are resurrecting the normal criteria for currency comparison, interest
rate cycles and economic growth. Interest rates are currently a dead
letter. With the possible exceptions of antipodean currencies, the
Australian and New Zealand Dollars, no central bank can be credibly
expected to begin raising rates before the middle of 2010. Even if
central bankers were not fighting a worldwide recession, the specter of
deflation, receding though it may be, is enough to wring six extra
months of low rates from any conscientious banker.
But not only have markets begun to watch economic
statistics again but selective interpretation has returned. When
markets have a strong set of assumptions directing trading contrary or
ambiguous information is often ignored or interpreted positively.
The United States International Trade Balance on
Thursday was just such a number. At -$26.0 billions the deficit was the
smallest in almost a decade, since November 1999. The rather
astonishing 28% drop in one month was mostly due to an $8.2 drop in
imports which are now at a five year low. Exports rose by $2.0
But lower imports are not a sign of economic
growth especially with a strong dollar making the prices of overseas
good cheaper. Weaker imports are an indication that consumers are still
retrenching, paying down debt not buying and that consumption will
remain a drag on economic growth. This negative interpretation was the
initial reaction to the release as the euro climbed to nearly 1.3300.
The market also ignored first time unemployment
claims which were above 600,000 for the tenth week in a row, and the
record number of continuing claims at 5.84 million.
These statistics were the main items of economic
news on Thursday each could have been negative for the dollar. But over
the course of the day traders seemed to come to the conclusion that the
powerful equity rally was more important. The euro closed at 1.3167
within 30 points of its low.
There are positive aspects of both statistics. In
the longest analytical view it will be far better for the global
economy if the United States has a sustainable trade relationship with
the rest of the world. The US cannot maintain a trade deficit from a
credit driven consumer economy forever. While it may temporarily
benefit the exporting countries such a systemic deficit unbalances the
world financial markets and was one of the contributing factors in the
collapse last fall. Since unemployment statistics are considered a
lagging indicator the longer you are along in a finite run the closer
you are likely to be to the end; and after ten weeks there is little
negative shock left in a mid 600,000 number.
But the more immediate interpretation of both
numbers could also be negative for the dollar: shrinking imports
signaling a contracting American consumer market and ten months of
record job losses pointing to even more consumer fatigue in the future.
On the last real trading day before a holiday
weekend, we saw the currency markets putting a positive spin on
ambiguous statistics and then willfully pursuing the equities for
uplifting economic news, these are two very potent psychological signs
of a higher dollar to come.
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