Friday, March 14, 2008
First things first. Regular readers will know by now that Macro Man's niche in the online financial world is not the detailed breakdown and explanation of complex issues for the benefit of the reading public. He has neither the time (OK, over the the last few weeks he has, but that is rapidly drawing to a close) nor the inclination to do stuff like that- it seems too much like school work. So anyone looking for a breakdown of Barney Frank's plan to save the world would do well to seek other pastures for that information.
However, permit Macro Man to occupy his natural milieu- that of pithy observation- and briefly touch on the Frank plan. The last large government-organized bailout of the US financial system occured 20 years ago in the wake of the savings and loan crisis. The creation of the Resolution Trust Corporation provided a dumping ground for institutions to deposit their crappy loans and thus clean up their balance sheets, and for some time Macro Man has thought that the endgame to the current situation would evolve around similar lines. However, this is the observation that Macro Man wishes to make: the RTC was established in 1989, the stock market didn't start rallying until early 1991, and the economy didn't feel as if it had improved until late '92/early '93. The moral of that particular story is that just because a plan of action is in place doesn't mean that things will improve immediately.....so view the late session bounce in the S&P with that in mind.
Elsewhere, yesterday was just another day and another dollar shag-fest. One wonders if the world's financial press have written a macro in their word processors; you know, hit Shift-F9, and the headline "Dollar trades at new all time low" magically pops up as the headline. Anyhow, the days of the emerging consensus of a dollar rebound seem like a long time ago now, don't they?
However, would you believe that there are some currencies that are doing even worse than the dollar? And no....Macro Man isn't talking about things like the Zim dollar, which don't really count as currencies. He means actual, real currencies, stuff that he has traded professionally within the last twelve months. So let's have a look at the company that the dollar's been keeping (note that on these charts, a trend to the upper right means that the dollar is appreciating):
1) ISK. Yes, the Icelandic krona has done even worse than the dollar, as USD/ISK has risen more than 10% this year. Bear in mind, it doesn't say much about the dollar when you have to compare it with the currency of a country with a double digit current account deficit and a population roughly the size of Toledo, Ohio, but hey- you gotta start somewhere! Remember, boys and girls: you can't spell "risk" without "ISK".
2) ZAR. Hmmm, what's not to love about the rand? South Africa has a bigger inflation problem than the US, a bigger current account deficit as a percentage of GDP than the US, and a less credible head of state than the US. Plus, there's nothing quite like widespread power cuts and rumours that the 2010 World Cupo will be moved, is there?
3) KRW. Perhaps the most surprising of the bunch, the Korean won is a real live currency from Asia- you know, the region that's home to the world's most chronically-undervalued currencies! Obviously the bulk of won weaklness has come in the last week or two, suggesting a pretty heavy flow. Bear in mind that Korea is one of the few Asian countries with a current account deficit (it's the worst of the best?), has a reasonably heavy foreign participation in its equity market, and has a hegemonic shipbuilding industry that has been chronically overhedged in the currency space (i.e., short USD/KRW.) Also, the KRW had strengthened the most of any Asian currency over the past several years, so perhaps some payback was due when things started to go wrong.4) TRY. While the Turkish lira has actually performed much better than expected amidst all this turmoil, it's still weakened modestly against the buck so far in 2008. Then again, this is a country with a large c/a deficit and high inflation....and oh, is early in the process of going cap in hand to the European Union and asking to be admitted to the club.
What's interesting is that all four of these currencies suffer from current account deficit countries, suggesting that external imbalances may be one of the underlying drivers of currency markets so far this year. Then again, AUD and NZD are at multidecade highs...so perhaps not.
All Macro Man can say is that if he takes his freshly-minted UK drivers' license and goes on a driving tour around Europe, say into France and Switzeralnd, he will undoubtedly blanche at the prices. Eventually, this will set up as an excellent trade to buy dollars (USD/CHF at parity is just wrong wrong wrong)....but like the US 2's trade, patience will be required before execution.