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June 23, 2011 – Comments (0)

Author: OrmontUS

Board: Macro Economics

Today, I'm going to take a peek at a bit longer perspective of where currencies have been heading over the past month or so. While the daily tracks are useful for equity traders, the longer term trends are helpful to smooth out the blips caused by news releases.

The major stories affecting currencies are:

1) The obvious problems with the Euro. This has strengthened the Swiss franc as well as the US dollar. Gold and silver, while rising against the Euro have been pretty much flat against the US dollar and the Swiss franc. After the lessons of 2008-9, liquidity is now defined as cash rather than assets.

2) Concerns about China's handling of their internal inflationary pressures and their attempts to balance their huge US dollar reserves by acquiring Euros (frankly, I suspect they are buying Swiss francs instead in greater quantities than has been reported - that's what I would do). This has had a negative effect on the Australian dollar.

3) The slowdown in Japanese manufacturing because of the effects of the tsunami. This has also negatively impacted the Aussie, but rebuilding could pick up much of the slack.

4) Less apparent, so far, is the effects of fear about deficits and the fight over raising the debt limit in the US. Apparently, the growing deficit will not be encumbering for some years and there is a presumption that the debt limit will be raised without a forced default after Congress is done with "theater politics". In addition, while the Fed has stated that they are not extending quantitative easing, there seems a feeling that that attitude will not last for very long (either more "QE" or some other mechanism which will have a parallel effect).

Euro: This currency has had a pretty choppy ride against the greenback. It rose to about $1.49 in early May, dipped down to $1.40 in late May, rose again and is now dropping to the current $1.425. While the numbers appear similar, it is important to note that the total swing is about 5% over a sliding 1 month.

Swiss franc: With the exception of a "risk off" (or central bank intervention?) during mid May, the CHF has continued its strength against the US dollar. It has recently been closely range bound near its high against the USD for most of June and currently stands at about $1.19. The trajectory of the CHF against the Euro has been more consistent with the CHF steadily strengthening for the past three months and it currently sit at about its yearly high (I think its all time high as well, as it has appreciated by about 1/3 over the past three years). Despite its relatively small size as a currency, the efforts of the Swiss Central Bank to mitigate its rise and the recent reports of the fragility of large parts of its banking system, the currency seems to be the "go-to" alternative to the US dollar because of the ease with which it can be traded.

Aussie: While the Aussie has appreciated about 80% since its low in late 2008, since hitting its high against the US dollar in early May (at $1.095), it has been range bound at between about $1.05 (where it sits today) and $1.07. There have likely been massive withdrawals of Japanese funds which had been parked there to capture the high interest rates as well as uncertainty about the prices of commodities (and some reflection regarding the loss of production due to Mother Nature induced events).

Currencies I don't "follow" include the Yen (range bound at about 80 for a month) because I can never figure it out and the Canadian dollar because its values are frequently determined by its trade with the US and therefore the currency ratio is somewhat artificial.

On a more immediate basis, the US dollar was sharply up last night which indicates a lousy opening for the US equity market. If it continues to strengthen through the day, it will likely be a red ink day for US equities.

Jeff

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