Amid some undoubtedly premature waves of optimism in the markets about economic, corporate and financial trends, the dollar’s recent rally has generated some bullish speculation about its medium-term trajectory.
Beware, says Jim Rogers, the dollar’s rally is set to end in a “currency crisis”, probably this autumn or the autumn of 2010. Having savaged the UK economy, the floundering pound and the US economy and its crumbling institutions so far this year, the talkative investor has now told Bloomberg Television that he may consider adding to his yen holdings, prefers the euro to the dollar or pound, and will bet on a slide in equities after nine weeks of gains. In fact, he says, he may well avoid equities for the next two to three years, as their recent gains signal a correction.
A dollar crisis has been “building up for a long time”, he noted. “We’ve had a huge rally in the dollar, an artificial rally in the dollar, so it’s time for a currency crisis.”
And – surprise, surprise – Rogers thinks commodities are still among the best bets for investors because of constrained capacity. He has been buying agriculture-related commodities and prefers silver to gold, palladium and platinum, he added.
Rogers joins “Black Swan” author Nassim Nicholas Taleb in his dollar-aversion, notes Bloomberg. Taleb told a May 7 conference in Singapore he preferred gold and copper to the dollar and the euro as the global economy faces a “big deflation.”
The dollar rebounded from a four-month low on Monday, largely as “European corporate earnings failed to trigger fresh gains on global equity markets”, notes the FT. But over the past 12 months, adds Bloomberg, the US currency has climbed against all the G10 currencies except the yen, and on Tuesday was at $1.3592 per euro from $1.3582 the previous day.
Given the relatively limp performances of some key currencies in past months, that is not saying much. And currency pundits broadly seem to agree on taking a cautious view of the dollar.
Ashraf Laidi, chief currency strategist at CMC Markets, says the dollar’s recent bounce may not yet signal the end of the currency’s broad selling, not least because “Mondays have often proved typical occasions for profit-taking of the preceding sessions:
The dollar’s decline below its key long term trend (200-day moving average) against EUR, AUD, CAD and NZD was accelerated by a powerful combination of appreciating upside momentum in equities and commodities. As long as US equity indices are set to pursue their own 200-day moving averages (954 on S&P500 and 9,000 on the Dow), selling pressure in the dollar will remain, especially as this week’s calendar expected to show a slower deterioration in US retail sales and industrial production.
The euro’s soaring momentum has been especially boosted by a double shot of euro-based factors (for example, the ECB’s decision not to implement bond purchases until June at the earliest) and dollar-negative factors (for example, the shift into risk assets/currencies and broadening global equities/commodities recovery).
Laidi adds that “any signs of improved recovery from China and/or second derivative factors from Europe and the US could draw fresh buying momentum into EUR vs USD and GBP”. But after figures on Tuesday showed a sharp decline in China’s exports (a year-on-year 22.6 per cent decline in April) and a big surge in domestic stimulus-related investment (up 30.5 per cent in the four months to end-April from a year earlier), the trends from China are, at best, mixed.
Richard Grace, CBA’s chief currency strategist, says there are four major factors which have led to the dollar’s recent decline, and are likely to maintain mild downward pressure on the currency over coming quarters:First, the large scramble for USD liquidity witnessed in Q4 2008 has largely run its course. The use of the Fed’s USD swap facility in order to provide USD liquidity has continued to decline. Forced de-leveraging has run it course as equity markets have improved. Banks have moved to re-capitalise themselves and credit spreads have narrowed. The US 3 month libor has moved below 100 basis points, with a subsequent narrowing in the global libor-OIS and US Ted spread. In short, the support the USD received due to safe haven flows has subsided and is probably being reversed.Second, US residents have returned to investing offshore after undertaking a large-scale repatriation of capital during the fourth quarter of last year…But nominal GDP must begin to growth again if recent equity market gains are to be supported. Our central scenario is that this will occur, albeit at a tepid rate; typical of the recovery path following a credit (and banking crisis) recession.Third, the growth/contraction rates in the US economy relative to the G7 are not enough to move the USD out of its neutral zone; an area where the USD tends to languish. Hence, some mild softness in the USD remains the likely scenario.
Fourth, relative short-term interest rates in the US are not supportive of a sustained USD appreciation. Our US-G7 weighted two-year interest rate spread suggests the USD may continue to ease, given it does not have the support of higher US interest rates.
The dollar, therefore, is likely to see further mild depreciation, particularly against the “commodity currencies” and the Asian currencies, “whose region is set to recover well before the US (and European) region”, concludes Grace. This, he says, is due to China’s accelerating growth and the lower sub-prime exposure of Asian banks to the US and European housing cycle. Against the euro, pound and yen, the dollar’s movements are likely to be milder due to the still-sluggish (but improved) economic outlook in those particular economies.
Meanwhile, adds Grace, watch the Aussie dollar, and three key factors that will continue to drive it higher.
(1) Further improvements in the global economy from the “shell-shock” experienced in Q4 2008 – including prospects for China’s economy to emerge from its cyclical downturn and show more rapid growth.
(2) Australia’s better relative economic-health, providing support for the AUD.
(3) Volatility continues to subside in equity, commodity and currency markets, creating a more comfortable environment for offshore investors and a flatter AUD volatility curve
While the Aussie could spend some time consolidating recent gains before appreciating further, a large dip in the currency below 0.70 cents “now looks unlikely”. More likely is a retreat closer to the 30 day moving average of 0.7230, but the trend is still up, concludes Grace. The New Zealand dollar, meanwhile, looks set for a downward correction and warrants some short-term caution.Despite the persistence of recession in the New Zealand economy, the NZD is nevertheless likely to grind higher over the medium-term in anticipation of the conclusion of the RBNZ’s easing cycle and a recovery in the New Zealand economy at the end of this year.
Related links:
TIPS for China on its dollar problem – FT Alphaville
Dollar rally will end, says Rogers – Bloomberg
Rogers turns his sights on the US and many other things – FT Alphaville
Dollar recovers as risk aversion revives – FT