May 26, 2009
Posted by: Dave Bhagat
"If you don't know where you are going, any road will get you
- Lewis Carroll
It has been a few weeks since I last wrote this column. There
is clearly more optimism about the prospects for a global recovery
than there was a couple of months ago and equity markets have
rallied as a result. There had been some slightly more constructive
data here in the U.S. as well, but some of those indicators have
since stalled. The global optimism can partly be explained by the
significant easing of financial conditions here and around the
world and increasing optimism in Asia based on a belief China has
turned the corner. On the other hand, rising unemployment and weak
consumption remain severe drags on our economy.
As I had predicted, the dollar has slipped. The dollar index fell
to new lows for 2009 on Friday, while the euro came closely to
matching its early January highs. The weakness has been
broad-based; even the JPY has participated, which negates the
argument that the dollar's weakness is purely a function of rising
risk appetite. Had that been true, the JPY and CHF should have been
weaker vs. the dollar and substantially weaker on the crosses,
which is not the case.
I believe this dollar sell-off is largely a reflection of where
markets perceive the U.S. is in its economic cycle compared to the
rest of the world and the relative prospects for a bounce.
Quantitative easing (QE) is predictably beginning to hurt the
dollar, and given the likelihood of a long period of lackluster
demand and consequently no inflation concerns, it is likely the Fed
will stay on hold for a long time - at least until the middle of
next year, possibly into 2011 in my opinion. As of now, it appears
other G10 central banks, including the BOE, ECB and RBA, will begin
to raise rates somewhat earlier. It is increasingly likely that
some of the money currently invested in U.S. assets by the Chinese
and other foreign investors will look for new homes outside the
U.S. As a result, we might be approaching a perfect storm - low
short-term rates, a nervous bond market on concerns about rising
fiscal deficits, waning investor interest, and finally, decreasing
risk aversion, which had served as a prop for the dollar until
That does not mean the dollar's downtrend is a one way bet
forever. Markets tend to be volatile when they are turning, and
uncertainty about the timing and pace of the global recovery should
increase volatility and make longer-term trends less predictable.
The dollar's challenges listed above are relatively mild when
compared to the GBP, for example. Britain is more likely to suffer
a ratings downgrade than we are over the next year, as public debt
in the UK is likely to approach 100 percent of GDP. That will force
austerity measures in the current and future budgets and scare bond
investors, probably leading to medium-term currency
underperformance and higher long-term rates.
Finally, let's bear in mind that in this global era of weak
economic performance, declining exports and non-existent inflation,
most governments favor, even actively seek, weaker currencies.
Expect howls of protest from Europe, Japan, Australia and others if
the dollar continues to fall and their currencies rise, which would
tax their domestic economies and tighten monetary policy.
India got some good news last week and the Indian rupee (INR) has
surged. The elections gave a broader mandate to the ruling Congress
Party, enabling them to form a government without relying on help
from the communists as they have for the past five years The result
is optimism about future economic reforms, notably on removing more
barriers to foreign direct investment in India and ownership of
Indian companies, and also reform in areas such as labor law.
Historically, reforms have tended to move at a slower pace than
anticipated and this time may prove similar, despite hopes to the
contrary. India was on a verge of a sovereign downgrade on concerns
about rising fiscal and external deficits. The elections should
result in a surge in offshore investments, which could swing the
balance of payments back to a surplus despite a lingering current
account deficit. Even with a substantial domestic economy, India
needs a global rebound to rejuvenate its export sector and provide
a boost to GDP. On the other hand, it is an importer of oil and
other commodities, making it susceptible to rising commodity
prices. Despite these challenges, growth is projected to rise to
over 6 percent in this fiscal year. Post-election optimism has
caused the Indian stock market to rally by 14 percent last week,
and the INR by almost 5 percent. While further gains might be
harder to come by in the near term, the elections have reduced
downside threats to the economy and currency and I believe the INR
will be at 46 or stronger by the end of 2009.
Though much has changed in the past few weeks, there are still
some enduring themes, the main one being continued weakness for the
dollar until positioning, valuation and an uptick in the economy
result in a rally. I don't see that happening to a meaningful
extent until 2010. I expect the GBP to underperform most major
currencies for several months. Europe and Japan have their own
challenges, but both the EUR and JPY can rally further vs. the
dollar. Despite the recent rally, the CAD, AUD and other commodity
currencies still have some upside - as do some emerging market
currencies - as long as equity markets remain strong to stable and
risk appetite remains intact. Betting on stable equities and
continued risk appetite is never safe, but it does appear as if
cyclical factors favor those trends globally, perhaps less so here
at home. Asia remains the part of the world best positioned to
rebound, especially if they can wean themselves off their reliance
on exports by boosting domestic demand.
The following excerpt will be included in your message.
Currency MusingsOctober 22, 2012 Posted by: Dave Bhagat
"If you don't know where you are going, any road will get youthere."
- Lewis Carroll
It has been a few weeks since I last wrote this column. Thereis clearly more optimism about the prospects for a global recoverythan there was a couple of months ago and equity markets haverallied as a result. There had been some slightly more constructivedata here in the U.S. as well, but some of those indicators havesince stalled. The global optimism can partly be explained by thesignificant easing of financial conditions here and around theworld and increasing optimism in Asia based on a belief China hasturned the corner. On the other hand, rising unemployment and weakconsumption remain severe drags on our economy.
As I had predicted, the dollar has slipped. The dollar index fellto new lows for 2009 on Friday, while the euro came closely tomatching its early January highs. The weakness has beenbroad-based; even the JPY has participated, which negates theargument that the dollar's weakness is purely a function of risingrisk appetite. Had that been true, the JPY and CHF should have beenweaker vs. the dollar and substantially weaker on the crosses,which is not the...Read More