News in the foreign exchange markets this week was culminated when a global consortium of central bankers descended on beautiful Jackson Hole Wyoming. Featured speakers, of course, were Janet Yellen, the Fed's first chair lady, and the veteran banker from the ECB, Mario Draghi.
They gave contrasting assessments of the status of their economies. It was acknowledged by Yellen, seemingly a reluctant hawk, that the US economy continues to grow. The unemployment situation does require close monitoring, but seems to be gradually improving. For the equity bulls who have profited using the ample supplies of free money, this seems to be a warning. Come October, the Fed's purchases of bonds, which expand the money supply, will end. It would seem, without the Fed's purchases, bond yields will gradually work higher, though the official Fed rate may linger around zero per cent a bit longer.
Nothing, then, to upset the USD bulls, as the dollar rallied about 1% for the week. A large part of this rally was against the euro and the yen. The COT report released this afternoon, and based upon futures and options positions at the CME at the close of August 18, shows speculators are short the euro and the yen by a total of 325,200 contracts.
Normally such a large position would make the specs wary, but the comments by ECB President Draghi did nothing to frighten the euro bears. He acknowledged the EU economy needs help and the ECB remains ready to aid their ailing economies, however, fiscal stimulants are also needed. From Bloomberg:
Draghi said he is "confident" that the package of measures will boost demand, while warning there is still a "real risk" that monetary policy loses some effectiveness.
He proposed four areas in which fiscal policy could be improved: better use of flexibility within existing European Union rules; lower taxes; stronger fiscal coordination between governments; and EU action to ensure a large public investment program. He also said such measures could only buy time.
"No amount of fiscal or monetary accommodation, however, can compensate for the necessary structural reforms in the euro area," he said. These reforms "can no longer be delayed. "
These comments by Draghi seem like a stern warning for German Chancellor Merkel and her band of uber frugal followers, as well as the control disciples in Brussels. To commence such a coordinated economic stimulus plan, a strong EU leader with vision would need to magically appear. If such a leader exists, they would present a spending plan all would accept. No such plan or leader exists.
The US economy may be leading the come back from the great recession, but under Obama administration, the US debt has grown from about $9.2T to almost $18T. The spending spree in the US was a big stimulant to markets and the economy. What happens when the bills come due remains a mystery.
Perhaps the current spread in the ten year bonds is a partial result. Currently the US ten year yield is 2.40%, compared to .98% in Germany, or 1.37% in France. Even in Spain the yield is less than that in the US, 2.38%.
If the EU members had a vigorous program of deficit spending after the 2008 recession, chances are their unemployment rate would be lower than the current 11.5%. The EU failed to opt for the stimulus. Now they seem headed for another recession and a currency, the market thinks is destined to test the 1.30 handle.
While the central bankers took most of the markets' attention on Friday there was some positive news coming from Canada. The retail sales number was expected to be a positive 0.3%, but the pundits were surprised when the number was an increase of 1.1%. Further the May number was adjusted upward to plus 0.9%.
How much bigger would the retail sales number be if the Canadian shoppers stayed home? According to the Financial Post, 55 million Canadian visited the US last year. For a country of around 35M that averages 1.57 visit to the US by every Canadian each year. Despite the Loonie's 9% discount to the US the shoppers still buy.
The Canadian yearly CPI did retreat to 2.1% from 2.4% last month, and may be viewed as just about right by the Bank of Canada. After release of these numbers Governor Poloz, from Jackson Hole, had these comments:
Poloz said the economy has "lots of room to grow," suggesting a spate of stronger data points won't sway the central bank from its plan to leave interest rates unchanged at least until well into next year.
Mr. Poloz made the comments in an interview Friday, after Statistics Canada reported milder inflation and stronger-than- expected retail sales. At the same time, the vast majority of jobs created this year in Canada are part-time positions, a phenomenon that Mr. Poloz said is a "symptom of slack" in the labour market. That argues in favour of maintaining a policy of low borrowing costs, as the economy is a long way from putting pressure on inflation.
The Governor, from the beginning of his tenure, has been a supporter of a weaker Canadian Dollar. Is a 9.5% discount to the USD enough? Recently the C$ has been hurt by the weaker price of oil. The current price is about a $17 per barrel discount to West Texas Intermediate for West Canada Select. This brings the price down to $77 per barrel in USDs.
The Canadian Dollar might also be at a disadvantage compared to the USD, as the specs pour into the USD for growth and possible safety.
For some, this discount represents value. Macdonald Realty Ltd. one of the largest brokers in British Columbia, reported last year 33% of their buyers for detached single family homes were sold to people with connections to mainland China. The average price of these homes topped C$2 million. The flight of private money from China continues.
For several weeks the CAD had been weak, flirting with the 1.10 handle. At the current level in the mid 1.09's, I am inclined to buy the C$ versus the USD. If the US economy is really on the recovery road, the Canadian economy is sure to tag along. Seventy per cent of Canadian exports go to the US.
Besides, sometime there may be some USD selling, which should help a long CAD position. A return to the 1.07 level is possible. As always, manage your money carefully.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.