Wednesday FX View: Currency Direction Up in the Air

The outcome to the stress testing process was an early factor in governing the direction of the dollar as a media story circulated stating that Bank of America might need to raise $34 billion in capital. The fear subsided shortly after, however, as the ADP employment report predicted a smaller than anticipated number of private U.S. job losses for April. The euro is trading either side of unchanged and currently stands at $1.3310 as stocks continue to rally on hopes that Friday’s official non-farm payroll report will come in lower than forecast and hasten the economic healing process.

The ADP report arrives two days prior to the government report and covers only private sector job movements. It doesn’t have a particularly good track record of predicting the official out turn and doesn’t include changes in government job hiring, which also picked up in April. Today’s 491,000 job less reading records an improved tone to the labor market and provokes discussion as to whether the current 8.9% unemployment rate will reach a double-digit pace sometime in 2009. The BLS will report a 610,000 job loss on Friday according to current predictions.

Traders brushed off the earlier BoA story in which the bank is said to require a further $34 billion in capital beyond the stress testing report. The early morning story hurt commodity currencies, which again staged a later rebound. Today the IMF noted a reduction in Asian growth to include Japan, Australia and New Zealand. Following a 5.1% growth rate in 2008, the IMF dragged down its 2009 forecast for the region to 1.3% while calling for a 4.3% rate next year.

The local dollar is currently unchanged against the U.S. dollar at 74.25 cents after Australian retail sales grew unexpectedly sharply in the month through March at a 2.2% rate. Economists had predicted growth of just 0.5%. The trade surplus also widened to A$2.5 billion thanks to slowing imports but a pick up in the pace of Australian farm exports. Investors remain nervous about extending the recent break higher in the Aussie ahead of the official stress test results due Thursday.

The People’s Bank of China made ripples overnight with its latest quarterly monetary report. It warned against the longer term potential inflationary effects of quantitative easing in the aftermath of the financial meltdown. It said that “a policy mistake by some major central bank may bring inflation risk to the whole world.” It added that quantitative easing may lead to a high risk of a major currency being devalued. We guess the caged reference here is to the dollar and this logically follows March comments from Wen Jibao, the Chinese premier in reference to fears for the rather large hoard of some $744 billion, which the Chinese hold in U.S. treasury bonds and notes.

One has to wonder what the impact would be if the Chinese decided to side with a currency that didn’t adopt quantitative easing such as the euro. Imagine the ripple effect if China sold its dollar-denominated debt and piled into Eurozone government bonds. There would be all-round dollar weakness at the expense of a euro heading towards an all-time high. But the problem with that scenario is that, like Japan, Europe doesn’t need currency strength to heal what will be an anemic recovery if it can ever stop shrinking.

On Thursday the views of the 22-member ECB will be aired on the prospects for priming the Eurozone with printed money. The scope of opinions ranges from “do” to “don’t” and what we already know is that the ECB will not take that path until we have been told that monetary policy has been eased to the hilt. Yet discussions on where that low point will be remains clouded.

The British pound remained above $1.50 despite the ebb and flow of risk aversion stories. The CIPS/Markit survey showed a rise in the services index to 48.7 in April from 45.5 in March. That’s still contracting, but we guess that investors expect a resumption of service sector growth as soon as next month. Meanwhile the Nationwide Building Society revealed a strong rise in consumer confidence in its latest reading.

Comments

[Morrison Bo...:]

Andrew Wilkinson's phrase, "One has to wonder what the impact would be if the Chinese decided to side with a currency... " shows the risks of the current multicurrency system. The value of people's money should not depend upon decisions by one country regarding the currency of another. It should not depend upon buying and selling of currencies in a marketplace.
Instead, we should be moving to a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union.
If 16 countries can use the same currency, why not 192? The euro is definitely a harbinger of the future, and soon all 25 EU members will be part of the EMU. The IMF has even urged several EU members to "euroize" even before completing the standard accession process.
In addition to eliminating currency fluctuations, the use of a Single
Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate currency risk, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totaling more than $4 trillion); and bring other benefits worth trillions, such as reducing the impact of global financial turmoil such as we are now experiencing.
The Single Global Currency Assn.(singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That’s only 15 years away.
The world is moving toward a Single Global Currency through the
creation, expansion and merger of regional monetary unions. Another route is through international monetary conferences proposals and agreements, such as were seen at Bretton Woods.
The challenge now is to reach that goal deliberately, as soon as
possible, with as little cost and as few crises as possible. If the
eurozone were to merge with the U.S. dollar of the yen, or if the yen
and the U.S. dollar were to form a monetary union, the road to a Single Global Currency would be clear.
The only remaining questions about implementaiton of a Single Global Currency are: when? and how much cost and turmoil will the world endure before that implementation.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States

May 06 12:31 PM

[IronMeteor:]

I think to many dollar bears are cheering for a global currency without realizing the ramifications.

The Euro zone will not let the US and UK get fixed at this exchange rate. Neither would Japan or the Swiss. The dollar would soar to 1.18 to the Euro, exactly where the Europeans wanted it in the first place. Plus, once we set that rate, then there is nothing to stop countries from printing at will. This is exactly why we have floating currencies and can't have a fixed rate system.

The US after the Brenton Woods agreement is the best example of why we can't have one. That gave us the green light to print at will.

Only the market can discipline a central bank. The IMF or World Bank are political and gutless. Can you imagine the fight that would insue if the IMF tried to reign in central banks and control fiscal deficits. One country after another would leave it. The idea is DOA. Great theory, but not practical in a world dominated by politicians and bankers. The Chinese need to stop yapping about other countries until they let the Yuan float. Talk about the ultimate in manipulation. Its exactly this mercantile policy of having a cheap currency that is distorting international trade and turning westerners into indebted consumers.

They won't stop buying dollars, they can't. If they do, the Yuan rises and they sell less goods. But if they ever do, then watch out below. But what year is that, 2020.

May 06 06:11 PM