September 2009 could turn out to be a very exciting month for
the currency markets! Septembers have historically been big months
not just for the currency markets, but for the stock markets as
well. In data going back to the 1920s, the U.S. stock market has
shown more large moves in September than in any other month of the
year. In data going back to the late 1970s, the currency markets in
September have on average shown the largest monthly moves. Over the
years as an FX trader, I can attest to the September phenomena,
having been caught wrong-footed a few times incorrectly assuming
that the quiet, ho-hum markets of the summer months would
continue.
The obvious question then becomes: which way will the U.S. dollar
move? To help determine the answer to that question, let's look at
where the dollar has come so far this year and try to determine the
drivers behind the price moves. We can then make forecasts as to
where the major currencies will be against the dollar in
September.
The U.S. Dollar Index (DXY) chart below shows the index peaking in
early March, then reversing and falling with few
interruptions.
U.S. Dollar
Index
Source: Bloomberg, SVB Financial Group
Although the index itself dropped 12.2 percent from its March
highs, the more compelling story lies in the performances over that
time period of individual currencies against the dollar.
Currency Performance vs. the
U.S. Dollar (March 5 to August 19)
Source: Bloomberg, SVB Financial Group
One can see from the table above that the currencies which gained
the most since March were of countries rich in commodities: New
Zealand, South Africa, Brazil and Australia. Since commodity prices
tend to be very volatile, prices of these currencies have followed
suit; hence, they are considered risky currencies. As commodity
prices have soared, these countries' central banks have hiked
interest rates in order to control economic growth and inflationary
pressures. The higher interest rates, of course, attract global
liquidity into their money and debt markets, thereby further
increasing the demand and price for their currencies.
The currencies which gained the least were of countries poor in
commodities: Switzerland, Japan, Singapore and Taiwan. The central
banks in those countries have a mandate to promote exports, so they
tend to artificially weaken their currencies by lowering interest
rates. This action lowers funding costs for their exporters and
increases the price competitiveness of exports. As opposed to the
risky currencies, these are considered safe haven currencies.
The bottom line is that currency values since March have been
driven by an increase in global investors'/traders' appetite for
risky currencies, based on higher commodity prices and more
attractive interest rates - all at the expense of the U.S.
dollar.
Interestingly, the currency markets - in particular the Asian
currencies - are closely aligned with the U.S. stock market. We can
observe the price action between the two by plotting the S&P
500 with an index of Asian currencies, the Bloomberg-JPMorgan Asia
Dollar Index (ADXY), which represents a weighted basket of Asian
currencies (Chinese yuan - 32 percent, South Korean won - 15
percent, Hong Kong dollar - 11 percent, Singapore dollar - 11
percent have the biggest weights) versus the U.S. dollar. Notice
the very high correlation between the two over the last year with
peaks and troughs forming virtually at the same time. As long as
the ebbs and flows of the appetite for risky currencies continue as
they have in the past, Asian currencies and the U.S. stock market
should continue to move in tandem with one another. (It is
important to note that although the Asian currency index does
lead the S&P 500
at times , it does not do so
consistently enough to be statistically significant.)
ADXY/S&P 500 Weekly
Chart
Source: Bloomberg, SVB Financial Group
To sum up, currency prices against the U.S. dollar remain in a
strong uptrend. Odds favor a continuation of that trend,
particularly in the risky currencies. However, as these currencies
have moved a long way in a relatively short period of time and,
having reached key retracement price levels, odds of a price
reversal, even if only on a temporary basis, have increased
substantially.
For my currency forecasts, I am going to be a bit of a contrarian
and bet on the latter scenario (Go U.S. dollar!). Here is where I
predict rates will be on September 30, 2009.
|
Australian dollar |
0.76 |
Mexican peso |
13.80 |
|
Brazilian real |
1.90 |
New Zealand dollar |
0.62 |
|
Canadian dollar |
1.11 |
Norwegian krone |
6.33 |
|
Chinese yuan |
6.85 |
Swiss franc |
1.14 |
|
Euro |
1.35 |
Taiwan dollar |
33.0 |
|
Indian rupee |
48.50 |
UK pound |
1.57 |
|
Japanese yen |
100.00 |
South African rand |
8.35 |
Happy trading/investing/hedging!