Posts Tagged ‘Exchange Rate’
Wednesday, July 25th, 2012
by Peter Tchir, TF Market Advisors
Chinese PMI was better than feared, but if I had to bet on what number is less manipulated, Chinese data or LIBOR, I would have to bet on LIBOR. Since we don’t have much else to work with, I guess we are stuck looking at it, and it shows that the slowdown is slowing, but I can’t get very excited about that.
European manufacturing PMI came in at 44.1, worse than the already low expectations of 45.2. The situation in Europe is deteriorating and all the summits aren’t helping. The banks need to be recapitalized and “uncertainty” needs to be removed or else business will continue to grind to a halt.
Most interesting, I thought, was that German Manufacturing PMI came in at only 43.3 and even German service remained under 50. Germany is not immune to the woes in the rest of Europe or to the global economy. French manufacturing PMI was an equally dreadful 43.6. Maybe the growing weakness in the core will light a fire. It isn’t enough to have firewalls. They either have to spend that money and finally take serious default and currency risk off the table, or the economies will continue to slide deeper into recession or depression.
Pesetas and Real Madrid
Spain had a reasonable t-bill auction today. The yields were high compared to any of the core with 6 month t-bills coming in a 3.69%. In a normal world, that isn’t bad, but in a world where Germany and others get paid to issue money for 6 months, it doesn’t look great.
In any case, talk of redenomination continues. Many people argue that the only way out for Spain and others is to exit the Euro and create their own currency that they can devalue at will.
I continue to see several problems with that. Devaluation will be controlled by the markets and not the politicians making it uncertain where the exchange rate will settle in. If the bets are “too high”, “too low” or “just right”, I would certainly bet against “just right”.
The uncertainty created by a new currency will be immense. The confusion for banks and businesses will overwhelm any possible business. Who will want to do business in a country with a highly volatile currency where the end result remains highly uncertain? Who will do business in similar looking countries? Trade will grind to a halt and demand for non-essential goods will dry up as people wait to see the results.
Finally, in a country where much of the “daily essentials”, particularly energy have to be imported, it is far more difficult to see how the people or the country, prosper. In successful devaluations, the country has often been natural resource rich and been able to “harness” those resources for their domestic economy during the devaluation process.
But those arguments are confusing, so let’s look at Barcelona and Real Madrid. Will Barcelona be able to afford Messi? How much of the revenue of these clubs from domestic markets? The higher the percentage of domestic revenue, the more expensive players will be. And it wouldn’t just be foreign players. Spanish players would also be tempted to leave. The clubs would have to pay their players in Euros. That could become a huge burden for Spanish clubs. As the peseta plummets, how will they afford these top players? Will clubs in other countries be able to pay them?
What if the situation in Spain erodes where daily protests become a way of life? What if the devaluation causes domestic problems? If political tensions grow and civil unrest increases will players want to stay in Spain when they could demand the same money elsewhere, without the additional risk?
Maybe Germany is hoping to transform the Bundesliga into the best league through currency devaluation? Yes, this is largely tongue in cheek, but it may be worth thinking about what Liga BBVA would look like after devaluation. People may not be passionate or understanding of the economy, but they are passionate and informed about their football clubs. In a world where much of the talent is imported and the local talent is free to leave, the analysis may not be as fanciful as it sounds. M
any Canadians saw it happen to their teams when a combination of a weak Northern Peso (this was pre loonie) and high taxes made it hard for Canadian franchises to compete (the BlueJays have never recovered). It wasn’t just sports. There were big issues of “brain drain” as many top people and companies looked to move to the U.S.
A weak currency may not be as helpful as people think and in fact may cause far more problems than it fixes, especially since this wouldn’t merely be devaluing, it would be creating a new currency and leaving a union, adding to the confusion and complexity of the task. Any real “progress” towards a near term redenomination would cause me great concern for all risk.
Markets really don’t seem to know what to do. The greed is saying sell-off because Europe is a mess, yet the fear is that enough government money and liquidity comes into the market that we ignite another rally.
Domestic credit continues to do okay. Spreads have widened in the past few days, but very calmly and with relatively little enthusiasm for any move wider. You can pick up some high yield bonds marginally cheaper, but that’s probably only until you engage an offer and find out they aren’t really selling.
My concern that Europe will mess this up is growing. They seemed to have been implementing small steps that could work, but they seemed to have slowed down, and the level of dangerous (and poorly thought out) rhetoric is growing. I will continue to keep a close watch on the situation and am continuing to lighten up risk, though will add when drops seem overdone.
The price action in Spanish bonds is chilling, but volumes are incredibly low.
Tags: Bets, chinese data, Currency Risk, Devaluation, Exchange Rate, German Service, Global Economy, Libor, Low Expectations, Madrid Spain, Politicians, Real Madrid, Recession, Redenomination, Slowdown, Summits, T Bills, Tf, Uncertainty, Woes
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Thursday, May 10th, 2012
On April 17 I wrote about a conversation (link) with an individual who lives in Athens. He had this to say about the coming Greek elections:
“The other parties are communists, radicals and crazies. If they have a hand in the new government, then on May 7 Greece will be forced to take dramatic steps. The whole idea that the country should suffer, so the bankers can get paid will have to change.”
He also said this:
“The attitude in Brussels and Bonn towards Athens will change after the election as well!”
He had that right, so I called him back to get an post-election update.
BK: Is it true that you will soon spending Drachmas?
Athens: This seems to be the only possible outcome. Germany will no longer support Greece, neither will the IMF.
BK: What would the new Drachma be worth in Euros?
Athens: Far less than the rate that was used to convert Drachma to Euros in 2001. At least 50% less. For Greece, the exchange rate for the Euro will be the key, but you can’t forget that the Drachma will also have a new exchange rate for the dollar.
Greece joined the Euro in 2001 at a fixed conversion of 341Greek Drachmas to the Euro (EURGDR). In the period preceding the link, the USDGDR was 328. Assume the Drachma floats freely and promptly loses half of its value versus the Euro. The market rate would be EURGDR 682. If the EURUSD was trading at 1.3000 it would mean that the USDGDR would be 568. The GDR would lose half its value against the Euro but it would only lose on 37% versus the dollar. I asked the fellow from Athens about this:
Athens: There is the proof. The Euro is too high against the dollar.
I thought that was an interesting comment. I went back and looked at the original conversion rates to the Euro for France, Italy and Spain and compared them to what the USD exchange rates would be today:
- The +11% results for these countries versus the USA looks wrong to me. I considered what the local currency rates would be if the Euro were lower in value versus the dollar. A rate of EURUSD 1.20 still doesn’t get it done for me. It starts to “look right” with the EURUSD at 1.10
- If the Euro were to be broken back into its original pieces, the old legacy currencies would trade around the Deutche Mark (DM). It is a very safe bet that if there was a free float of the currencies, the DM would increase in value versus all of the other EU members. It’s an equally safe bet that the USDDM of ~1.67 that was posted on 12/31/98 (last day of the DM) is going to also be much weaker (DM strength).
If the DM is going to make a comeback it will create a very nice new reserve currency. Money will migrate from both Switzerland and Japan to a different “safe” place. It will end up in Frankfurt. These are my estimate for what may happen:
USDYEN = +10%
USDCHF = +10%
DMYEN = +30% (1999 to date)
USDDM = -40% (1999 to date)
USDDM = Parity
DMCHF = Parity
DMFF = +15% (1999 to date)
DMLIRE = +20% (1999 to date)
DMPESETA = + 40% (1999 to date)
DMDRACHMA = +60% (2001 to date)
DMESCUDO = +50% (1999 to date)
DMGUILDER = +10% (1999 to date)
Of course these are just estimates, but I think the directional moves I describe will take place. The issue is how long it will it take and how violent the markets will be. On that score, I would estimate that it would take at least a year for these adjustments to take effect, the process of making these adjustments will be very violent indeed. One thing is clear to me, Germany is going to take the brunt of the adjustments that must follow.
The Germans are going to get hit from all sides. Its currency will rise against all the EU countries, it will rise against the Dollar and the Yen. This reality is the reason that Germany has done what they have to avoid a breakup of the Euro. I don’t think they can avoid the consequences much longer. Germany is now stuck between a rock and a hard place.
Tags: Athens, Bk, Communists, Conversion Euro, Conversion Rates, Crazies, Currency Rates, Drachma, Drachmas, Dramatic Steps, Election Update, Eurusd, Exchange Rate, Gdr, Greek Elections, Imf, Nbsp, New Exchange, Radicals, Usd Exchange Rates
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Tuesday, November 1st, 2011
The CFLP manufacturing PMI for October dropped to 50.4 from 51.2 in September. The weakening trend was broad based except in the case of stocks of finished goods, which edged upwards.
The lower PMI is contrary to the HSBC Purchasing Managers’ Index for China, which signaled a stronger expansion by rising to 51.0 in October from 49.9 in September.
The somewhat weaker trend in the CFLP PMI compared to September was in line with that of previous “normal” years (2008/2009 excluded due to the great financial crisis), but it is clear how weak the manufacturing sector is compared to previous years.
Sources: Li & Fung; CFLP; Plexus Asset Management.
Although the CFLP PMI Manufacturing Index is supposed to be seasonally adjusted, a further seasonal pattern is evident in the graph above. I therefore adjusted the CFLP PMI further to get a clearer picture of the underlying trend. On my seasonally adjusted basis the PMI actually improved from 49.9 to 50.6. The severe knock in global trade as a result of the Eurozone sovereign debt crisis in September is especially evident in my seasonally adjusted CFLP PMI.
Sources: Li & Fung; CFLP; Plexus Asset Management.
The interrelationship between the manufacturing sectors in China and Japan continues as, according to Markit, Japan’s manufacturing PMI posted 50.6 in October compared to 49.3 in September. According to Markit the acceleration in Japan’s manufacturing sector occurred despite the fact that new export orders contracted for the 8th consecutive month mainly as a result of weak demand from China and adverse exchange rate factors. Perhaps trade between Japan and China is picking up?
Sources: Li & Fung; CFLP; Markit; Plexus Asset Management.
Stock levels in China’s manufacturing sector remain high compared to the level of new orders. The ratios of stocks of major inputs compared to new orders and stocks of finished goods to new orders point to a relatively unchanged CFLP Manufacturing PMI in November as the ratios tend to lead the PMI by one month.
Sources: Li & Fung; CFLP; Plexus Asset Management.
Sources: Li & Fung; CFLP; Plexus Asset Management.
November is historically a somewhat stronger month than October and a slight uptick in November’s CFLP PMI can therefore be expected. That is unless Japan’s manufacturing sector accelerates further.
Sources: Li & Fung; CFLP; Plexus Asset Management.
But what are the markets saying? The Shanghai Composite Index is pointing to a relatively unchanged CFLP Manufacturing PMI at this stage.
Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.
With input prices contracting the threat of higher inflation has receded. That, together with the significant lower growth in the manufacturing sector, may compel the Chinese authorities to relax monetary policy and cut rates soon.
Tags: Acceleration, Asset Management, Debt Crisis, Exchange Rate, Export Orders, Financial Crisis, Finished Goods, Global Trade, Interrelationship, Manufacturing Sector, Manufacturing Sectors, Markit, Pmi, Previous Years, Purchasing Managers Index, Rate Factors, Ratios, Seasonal Pattern, Sovereign Debt, Stock Levels
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Thursday, January 20th, 2011
This post is a guest contribution by Gray Newman of Morgan Stanley.
When Brazil’s central bank meets this week to review monetary policy, there is little doubt now that the authorities will raise interest rates. After having begun a hiking cycle just nine months ago – and then stopping the cycle just months later – the authorities now appear to be on track to resume with a series of hikes. We believe the most likely outcome is that the authorities will hike the overnight reference rate by 50bp to 11.25% on Wednesday, January 19. And while we reiterate our call that rates will rise to 12.50% during the year, we are concerned that the path is far from clear.
Inflation’s Origin? The Growth Mismatch
Last year when the central bank decided to abort the hiking cycle in early September, many argued that the hiking cycle was over. We maintained then and maintain now that more rate hikes would be needed in 2011. Our concern was simple: at the core of Brazil’s inflation problem was a mismatch between robust demand and sluggish supply (the Growth Mismatch). With limited visibility of any significant fiscal tightening, we argued that Brazil’s central bank would have little choice but to hike interest rates during 2011.
Brazil’s Growth Mismatch, in turn, is the result of the positive wealth shock, thanks to multi-decade high terms of trade and with it a multi-decade strong exchange rate. While a positive wealth shock sounds like good news, it also poses challenges. Indeed, it is what we refer to as the ‘risk of abundance’. A strong currency (along with credit expansion, consumer confidence and strong job and wage growth) has boosted the purchasing power of Brazilian consumers and produced consumption indicators as robust as we have ever seen in Brazil. The flipside, however, of a strong currency is the threat to domestic producers faced with new import competition. The result: robust demand side-by-side with sluggish supply.
Indeed, the latest data from Brazil released in the first weeks of the New Year continue to highlight the presence of Brazil’s Growth Mismatch. Industrial production in November was off -0.1% from the previous month, the fifth monthly downturn in the past eight readings. Industrial output, after peaking in March, has been largely stagnant since then. In contrast, retail sales growth remains robust. This past week we learned that retail sales in real terms rose by 1.1% in November: that is an annualized pace of more than 13%. And preliminary data suggest that demand for consumer credit remained robust in December.
Preliminary data and anecdotal evidence from December – from measures of heavy vehicle traffic on toll roads to car production and packaging paper demand – suggest that December’s industrial output could show an upturn after November’s disappointing downturn. That is certainly possible, but we would warn that we have been hearing advocates argue that industrial production was about to turn up – always next month – ever since we first began to highlight the Growth Mismatch at mid-year. There are indeed signs of an improvement in December, but we doubt that one month’s report will fundamentally change the broader picture that Brazil is facing – that of a stagnant industrial plant – which we suspect is due in part to the strength of the Brazilian real to levels that we have not seen in decades.
With uninterrupted evidence of the Growth Mismatch, it is still somewhat puzzling that the authorities stopped the hiking cycle with the last move in interest rates in July. The authorities have since argued that concerns over a failed bank played an important role in the decision to abort the hiking cycle. But by later last year, it seemed clear that the banking concerns had been contained and the drivers of inflation – robust consumer demand, boosted by stimulative fiscal and credit policies – all remained in place.
Three Factors Behind the Delay
We suspect that three factors delayed the move to restart the rates hiking cycle. An examination of these factors also suggests the risks present in 2011.
First, it is difficult to avoid the conclusion that political considerations played some role in the timing of the move to restart the hiking cycle. The regularly scheduled Copom meeting in October fell precisely between a two-round presidential election process: it is understandable that the central bank might have felt that a move on the rates front between rounds of voting could have cast an unnecessary spotlight on the actions of the monetary authority. At the next meeting in December, the case again could have been made that the Growth Mismatch (strong consumer demand side-by-side with sluggish supply) was present. But again, the political timetable might have played a role in the delay in December: a hike just before a change in central bank leadership could have been read as a sign that the new team needed the help of the outgoing leadership to jump-start the hiking cycle.
Second, monetary policy actions are rarely taken in a vacuum: monetary policy takes into account other policy actors – and on that front there has been some uncertainty over future non-monetary policy actions. The decision to hike rates as well as the timing and the magnitude of the hikes is also a function of other policy measures, including fiscal and ‘macro-prudential’ policy. In December, on the eve of what many rates watchers thought was the restart of the hiking cycle, the authorities announced a series of “macro-prudential” measures – hikes in reserve requirements and higher capital ratios designed to slow credit expansion. That move led the central bank in its December minutes to argue that while the credit measures were not “perfect substitutes” for monetary policy they were powerful and that the central bank needed “additional time” to “better measure” the impact before deciding on the course of monetary policy.
Of course, the macro-prudential measures are not the only policy actions the central bank is monitoring. There has been significant talk from the new administration of an important commitment on the fiscal front that would not only ease pressure on the rates front, but could be the catalyst to allow Brazil to lower interest rates. That policy uncertainty likely played a role as well in the decision to delay until now the restarting of the hiking cycle.
Third, identifying Brazil’s inflation dynamic has been challenging. After a significant uptick in inflation in the first months of 2010 – consistent with our call that demand was growing well above potential – monthly inflation turned down sharply during June, July and August when it averaged near zero percent for three consecutive months. There was some confusion: demand continued to outstrip supply and yet headline inflation appeared contained. Then at the end of the year, the uptick was largely centered in food and in part exaggerated in the year-over-year reports, given an unfavorable base of comparison. Indeed, we expect to see some reversal in the year-over-year reports in the first months of the year. It’s worth noting that food, which accounts for just under one-quarter of the Brazilian consumer price index IPCA basket (23.1% at the end of 2010) accounted for nearly half of the 5.91% inflation result for the year. But it would be a mistake to blame this simply on food: service and non-tradable inflation has been consistently running near 7% for much of the year – well above the 4.5% overall target. In the end, we suspect that the magnitude of the upturn in inflation as well as the deterioration in inflation expectations played a role in bringing the central bank back to the hiking cycle.
Macro Is Back
Our concern, however, is that it is far from clear how this cycle will end. While we have a central forecast of a series of hikes bringing rates to 12.50%, we suspect that there is still significant uncertainty surrounding that path. Brazil has had limited experience in which a hiking cycle was the proximate cause of a slowdown in demand: as often as not either events from abroad or domestic political concerns were the culprit in turning the business cycle. Add to this the political cycle as well as the potential tension with other policy measures – a hiking cycle can easily put undesired pressure on the currency to strengthen further – and the path becomes murky. And there is still considerable support within the administration that enough will be accomplished on the fiscal front so as to allow a reduction in interest rates.
Some may read this week’s move to hike rates as a victory for the central bank in regaining the upper hand after Brazil’s inflation moved close to 6% and approached the upper end of the inflation targeting band. We would be wary about overplaying the significance of the move. Instead, we suspect that the Brazilian policy response will be tested by the powerful wealth shock hitting the economy – simultaneously boosting domestic demand even while limiting the growth in supply. It is far from certain what exactly the mix of policies will be in response or how successful they will be.
Source: Gray Newman of Morgan Stanley, January 19, 2011.
Tags: Abundance, Brazil, Consumer Confidence, Credit Expansion, Currency, Domestic Producers, Early September, Exchange Rate, Flipside, Import Competition, Inflation Problem, interest rates, January 19, Mismatch, Monetary Policy, Morgan Stanley, Nine Months, Purchasing Power, Rate Hikes, Robust Demand, S Central, Visibility
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Thursday, August 26th, 2010
Post Lehman, markets have showed themselves particularly prone to panics, which is why good ‘panic indicators’ may be the cheapest way to monitor when it is necessary to purchase protection against fat-tail risks. There are of course many such tools, but one of the most reliable panic indicators is the EUR/CHF exchange rate and the daily volatility of this cross rate, especially as compared to Spain 10-year government spread over German Bunds, and the volatility of US long bonds. As the charts on p. 2 show, there are a signs that the European sovereign debt crisis is still worrying investors, while the pile-up in cash confirms a point we made in Friday’s Daily—namely, that today’s only crowded trade is on the sidelines. So what are the odds that either of these two concerns—another sovereign crisis or a US double dip—reach a tipping point and become a “panic”?
- EU Sovereign: CDS on weaker sovereign countries remain elevated, and the recent jump in the Swiss Franc points to possible further widening of Euro sovereign spreads (see top chart, p. 2). One could argue that, ever since the EMU rescue package on May 9th, the risk of an outright default in Europe has dropped significantly and that the recent drop in the Euro and the widening of sovereign spreads is not entirely justified. On the other hand, a lot of investors are still not convinced that the political situation in Greece will allow the country to take the pain necessary to reform (and we have seen more signs of discontent over the past few weeks)—and instead citizens will clamor for a default scenario. Overall, EMU equities have been outperforming on the reform theme, and our view is that they will continue to do so (especially if the Euro keeps weakening). In this sense, it makes sense to position for further equity gains, but hedge with some default insurance.
- US economy: The risk is that double-dip concerns will soon be upgraded to the dreaded “secondary depression”, a classic during the Gold Standard years. Indeed, Charles has long argued that such a panic is necessary in order to force the US to cut spending/interference. This is precisely what we saw in Europe, with the panic in weaker sovereigns forcing the start of a new era of fiscal restraint on the continent. This is why we have recommended that investors hedge their global equity positions with zero coupons, with the VIX index, with cash in a ‘good currency’, or with Asian long-dated bonds.
At this stage, most investors are well-informed of the above risks and presumably portfolios have been adjusted appropriately. But what if the panic comes from the other direction? Readers will know we are not in the double dip camp (see Markets Are Pricing in the ‘New Normal’ and A Misunderstood Quarter). Besides anything else, we think the US political system is unlikely to tolerate a prolonged period of spend and tax government. One of these days, the markets will start focusing on the possibility of a political change in the US, putting the US on the path of much-needed decline in US government spending as a percentage of GDP. Then, who knows, we may have a “panic” buying on equities? In which case the best strategy at the moment would be to gradually sell the asset going through a buying panic (e.g., long-dated bonds, Swiss Franc, etc… ) and buying the neglected assets (e.g., equities). After all, 50% of the return in a bull market is made in the first 10% of the uptrend (time-wise)…which is what most people sitting on the fences will rediscover eventually.
Copyright (c) 2010 GaveKal
Tags: Bonds, Bunds, Citizens, Clamor, Cross Rate, Debt Crisis, Default Insurance, Depres, Exchange Rate, Gavekal, Gold, Greece, Lehman, Odds, Panics, Political Situation, Sidelines, Signs Of Discontent, Sovereign Countries, Sovereign Debt, Swiss Franc, Tipping Point, Volatility
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Monday, January 25th, 2010
China is trouncing its economic competition when it comes to manufacturing exports. In 2008, China decided to hitch its trailer to the U.S. dollar, fixing its exchange rate at 6.83 yuan. This was a wise move on China’s part considering at the time, its export sector got destroyed by the global credit meltdown, and the shipping business all but died, following the bust at Lehman Brothers.
At the same time, China embarked on a bold $586-billion (U.S.) stimulus in the fourth quarter of 2008 to spend its way domestically out of the credit crisis, and loosened bank lending (which added $1.3-trillion in new domestic bank credit). This initiative on its part meant that China was able to stockpile cheaper commodities, buying them ahead of demand, and pump liquidity into its real estate and equity markets, while waiting patiently for its coveted export sector to return to prominence.
Pierre Daillie, (AdvisorAnalyst.com), GlobeAdvisor.com, January 25, 2010.
Tags: Bust, China, Commodities, Credit Crisis, Economic Competition, Emerging Markets, Exchange Rate, Export Sector, Fourth Quarter, Global Credit, Globeadvisor, Initiative, Lehman Brothers, liquidity, Meltdown, Prominence, Shipping Business, Stimulus, Time China, Trillion, Trump Card, Wise Move, Yuan
Posted in Canadian Market, China, Commodities, Markets, US Stocks | Comments Off