Where No One’s Eluded the Pain

In Europe, down South, there is Spain
Where no one’s eluded the pain
But now it appears
That after 5 years
Their exports are starting to gain

Yesterday was a bad day for the dollar, falling against almost all currencies whether developed or emerging.  USDJPY fell back below 100 for the first time in nearly a month, although it has reversed course overnight regaining almost all of yesterday’s losses.  The Nikkei clawed back some of its recent losses overnight as well, but what remains notable is the significant increase in volatility in both Japanese equity and bond markets.  Last night we saw what may be the first step toward inflation in Japan with wage growth there rising 0.3% in April, it’s largest increase in a year.  This matters as without higher wages, Abe-nomics is doomed to fail, which would likely result in a very sharp reversal of the past 6 month’s price action in both equities and the yen.  However, I continue to believe that Abe and Kuroda will stay the course and eventually find success… at least in weakening the currency.  The outcome for the Japanese economy seems far less certain.

Yesterday’s PMI data from Europe showed less weakness than had been forecast, but still all readings are below 50.  The euro rallied after the much weaker than expected US ISM data (49.0, exp 51.0) stopped all talk of the Fed tapering any time soon.  This was cemented by the Fed’s Lockhart overnight reiterating that there was no immediate plan to change Fed policy.  And so after a more than 1% rally on that release, the euro has retained most of its gains.  One of the more interesting stories overnight was the focus on Spanish export data, which has grown to a record in the past year (EUR 223 billion) highlighting that changes are being made in the periphery.  The question remains, will they be enough to address the many problems that still bedevil those nations, notably extremely high unemployment.  For now, the market seems to be more focused on the positives than the negatives, and the euro has been the beneficiary of that focus.

I haven’t focused on the commodity currencies in a while, but a brief look at the chart for AUDUSD shows a pretty impressive decline during the past month of more than 8%, although we are a bit more than 1% off those lows as I write.  Last night the RBA left rates on hold, as was widely expected, and retained their easing bias.  It seems that the Aussie’s problems stem from the continued moderation of commodity prices; the seeming end of the investment boom there; and the political situation with PM Gillard seemingly set to lose the election to be held in September.  If you recall, back in January I forecast the Aussie to reach 0.95, and we are awfully close now.  Is there room for a further decline?  Certainly, although my guess is that the recent pace of 8%/month will not be repeated any time soon.  Rather, I expect that the pace of decline will slow substantially, and that an eventual year end near 0.90 is now viable.  That would reflect continued slow growth globally, and continued moderation of commodity prices.  Interestingly, while AUD was tumbling, CAD showed a much more modest decline, just 4% or so, and has actually moved well back away from its recent nadir.  Again, the idea that CAD benefits from the US story, which despite yesterday’s data remains modestly upbeat; while AUD is tightly linked to China, where the story is one of less robust growth, seems to be playing out properly in the markets.  I continue to see room for CAD to trade back toward parity and beyond as the year progresses.

Finally, emerging market currencies are all stronger today, at least compared to last Friday’s levels, although some have had much larger moves than others.  ZAR remains notable for its significant price action where daily trading ranges have been more than 2% for 5 of the past 6 sessions.  One of the things I have learned over my career, is that periods of exceptionally high volatility often define the end of a trend.  If that is true then we must reevaluate all that is ongoing right now.  I will be doing that over the next weeks.  In the meantime, payables hedgers need to be focused on current levels, which still look pretty good in the medium term view.

Good luck