On the surface, last week’s currency market gyrations implied increasing uncertainty as Monday’s welcome return of risk appetite quickly gave way to familiar turbulence. But within the volatility, the franc and yen dip-and-surge, loonie rally to four-week-high and subsequent fall on US data releases, gold’s secular bull-market and imminent unraveling of the safe-haven trade clearly point to a significant retardation of the global economy, if not double-dip recession. Even as US ISM still above 50 and Brent solid above 110 should mean soft patch rather than outright double-dip, the market’s risk-on windows are fast becoming the exception rather than the norm.
The US economy seems edging closer to QE3 frustration in September as optimism from Monday’s consumer spending good news ran into the nonfarm payrolls disappointment towards the weekend. Virtually unchanged in August, despite expected addition of 75,000 jobs, the number reignited a fresh rush to safer assets while stocks erased the week’s gains. It also put expectations of further stimulus back on the table, dragging down the Canadian dollar and Mexican peso, which depend on US economic strength to provide demand for their exports. However, further asset purchase is fast becoming a double-edged sword for Fed chief Ben Bernanke as he buys time till the September FOMC, weighing the risks of flooding the market while inflation creeps up amid sluggish growth and high unemployment.
Despite negative US data, Europe has taken the font seat as the cross-Atlantic battle of the uglies rages on. The euro fell from near 1.46 to close at 1.42 as data showed July unemployment firm at 10 per cent and signs the German economy has started slowing. Berlin’s political squabble, too, indicating a rough fight to clear the July bailout package amid increasing political and taxpayer reluctance to fund other countries’ debt, is euro negative in the immediate term. This means an ECB interest rate hike on September 8 is impossible. Inside recent ranges, the downside is open towards 1.40 if support levels of 1.4151 and 1.4079 are broken.
September will probably be the decider as the euro project’s existential crisis enters its endgame. With Italy having to finance 60 billion euros of debt, Germany scheduled to vote on the legality of the stability fund, regional banks getting caught in the turmoil and eurozone governments implementing austerity measures with their own negative spillover on growth, this will be the euro’s make-or-break month. Eye continued euro shorts, though it is safer selling against CAD as opposed to USD, especially before recession fears drag Brent down.
Cable (GBPUSD) also remains under selling pressure ahead of the BoE interest rate decision as weak construction data and a slowing economy have prompted even the harshest MPC hawks to rule out a rate increase, reflecting a sharp change in sentiment from as recently as June. The dovish shift has increased bets of QE extension and subsequent sterling weakness.
So far, market turbulence has tested the resolve of yen and franc monetary authorities to the maximum, with threats of intervention only briefly discouraging flight to their relative safety. But with continued currency appreciation sparking recession fears in Japan and Switzerland, strong and meaningful intervention is just around the corner. The Swiss might act on Monday (today) as Labour Day keeps the US market closed and volumes thin.
In Tokyo, the finance minister’s elevation to premiership cannot be a non-event for the yen just because Naoto Kan had five predecessors since ’06 alone. The yen’s reaction to Yoshihiko Noda’s elevation was a fall against higher yielding currencies, a tribute to his credentials after overseeing three currency market interventions in the past year. The market will not endure too much of safe-haven inflows into the yen and franc anymore, signaling a shift in perhaps the strangest of currency market ironies that punish prudent economic management in stable countries because of inefficiencies in other economies. Apparent forex market confusion betrays a clear underlying narrative. Be it fed stimulus, euro survival or safe-haven trading, pundits long for a sense of safety that is not coming.
