Thursday, July 12, 2007
If those legendary 80's musical mopers The Smiths were still actively recording, they would probably reconsider remaking one of their hit songs as "Dip-buyers of the World Unite." No doubt such a tune would be the theme song of Generation-Y financial market particpants, as yet again a risk event has (thus far) morphed into a buying opportunity. Whether that remains the case in the fullness of time remains to be seen, but for now we can evidently chalk up another victory to the dip-buyers of the world, perhaps masterminded by the nefarious Mrs. Watanabe.
Anatole Kaletsky had an interesting column in The Times this morning discussing the weak dollar and what it actually means. His brief discussion of the reasons for dollar weakness were woefully incomplete- not a single mention of Voldemort and friends!- but the contemplation of the weak dollar's implication is worth considering.
While modern hedging techniques can help delay and partially reduce the impact of exchange-rate pass through, over long periods of time the piper must eventually get paid, as Airbus is learning to its chagrin. That the US trade deficit has stabilized and even improved in the face of firm energy prices is, Macro Man believes, a testament to the impact of dollar weakness against European currencies in particular. We'll find out at 8.30 am New York time today whether this development continued in May.
Macro Man has mused before that the market is ignoring the cyclical dynamic in G4 currencies, potentially at its peril. The OECD recently updated its leading indicator series, and what do you know? Economic momentum is now stronger in the US (subprime and all!) than in Europe for the first time in a year and a half. If this trend extends over the next several months- and Macro Man sees no reason why it won't, given that Europe is just now feeling the bite of non-accomodative interest rates- this should, in the fullness of time, be reflected in currency prices.
News that CBs have perhaps filled their boots full of EUR for the time being is tempting Macro Man to sell some EUR/USD or GBP/USD here. However, he has toyed with the idea that the 'new range' for EUR/USD may have shifted to 1.35/1.39; therefore, it probably makes sense to wait and sell as close to 1.39 as possible.
Morever, it's not as if CB reserves are staying static. BOK was evidently in the market after hiking rates last night, and RBI ramped USD/INR higher early in the London session. Actions such as RBI's leave Macro Man shaking his head when he reads analyses suggesting that the US is somehow addicted to CB financing of the current account deficit. Deficits will always be financed at the appropriate price. As India has found, delaying that appropriate price from being reached can have unintended and unpleasant consequences (e.g., inflation.) At market-clearing exchange and interest rates, the private sector will be happy to finance the US current account- which, incidentally, would almost certainly be smaller (and thus easier to finance) at market-clearing prices that it is today.
After all, it's important to remember that there's more to the US economy than a fast-food nation of SUV drivers!