Tuesday, November 17, 2009
Following on from yesterday's post, Macro Man received confirmation this morning that Britain is, in fact, going to the dogs. He rolled up to the station this morning to find that his usual 6.33 service has been cancelled until further notice because of striking train drivers. (Apparently the reports of high unemployment are a fiction.) Fortunately, he was still able to make it to work on time.....because the previous train ran 20 minutes late and he was able to catch it!
Anyhow, there were a couple of interesting developments in the US yesterday. Headline retail sales surprised on the topside (though given revisions, the report was actually pretty much in line), led by, of all things, auto sales. Macro Man had expected auto sales after cash-for-clunkers to remain pretty weak for some time. And while the auto sales index did remain well below its C-4-C high, there was nevertheless a pretty solid bounce from the September low.
If this is emblematic of how the consumer will behave, there are a few itneresting implications. First, Macro Man's core view that the savings rate will push towards 10% will prove to be incorrect. US household saving should rise, and 'twill be a pity if it fails to do so. In any event, if Christmas sales prove to be unexpectedly robust, the chances of a late-year melt-up in risk assets will increase sharply.
A final implication would almost certainly prove to be an unexpectedly sharp widening in the US trade deficit, of which we received a hint on Friday. Given that the accumulated current account deficit of the US is the foundation of the DGDF thesis, an early re-widening could prove to be rather bearish for the dollar...particularly if the Fed refuses to compensate foreign investors for financing it. (Foreign owners of printing presses would, not doubt, continue to do so courtesy of their unwillgness to implement their own monetary policies.)
We saw a similar instance in 2003 and 2004, a period in which the USD weakened sharply against those currencies with market-determined exchange rates. Given the imprecations which are already flying towards Washington from Beijing, Frankfurt, and elsewhere, one can imagine how unhappy foreigners would be with a further sharp weakening of the dollar. (Judge for yourself how they might feel about a re-widening of the US trade deficit courtesy of sustained consumer demand.)
In any event, this backdrop provides an interesting prism through which to read Big Ben's speech to the New York Economic Club last night. After spending most of the speech bemoaning the prospects for commercial real etstae, bank lending, and unemployment (while also sounding rather confident that inflation won't be a problem for some time), BB addressed the issue of the dollar in an unusually stark manner:
The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.
That the Chairman of the Fed would mention the dollar so explicitly was news, as indeed was the cherry-picked headline "Fed Policy Will Help Ensure Dollar Is Strong" that flashed across the Bloomberg newswire. Now, anyone reading the previous 28 paragraphs could only reach one conclusion- addressing both sides of their dual mandate, the Fed ain't hiking rates any time soon. Now perhaps this means that the dollar should indeed be "strong"...but Macro Man suspects that most observers might reach the opposite conclusion.
This, in turn, raises the question of the provenance of the paragraph on the dollar. To Macro Man's eye, it looks like it was placed there for the benefit to the Chinese and Europeans (and maybe just a smidge for the gold-buying Joe Sixpack.) 28 paragraphs on why there's no reason to hike, one paragraph on how the dollar has retraced its crisis rally but why the dual mandate means the dollar should be strong. This looks like classic CYA stuff....
So, with the prospect of a late-year risk melt-up, a widening trade deficit, and a complacent central bank, the dollar must be toast, right? Perhaps...but perhaps not. For one, Macro Man isn't really prepared to concede the "rebuilding savings" argument just yet, nor that all financial sector skeletons have been premanently confined to the closets in which they reside.
Moreover, the euro in particular trades very poorly, like it's almost as crowded as the morning train that Macro Man will henceforth be required to catch. The price action of the last six weeks or so can be viewed as either a "teacup" formation, which is bullish....or a double top, which is not. At the risk of descending in chart-reading tautologies, the outcome will likely depend on whether 1.5064 or 1.4628 breaks first.
Just about everything that Macro Man sees says that EUR/USD should be going up, and yet it's not. And that, if you're long, might be even more annoying than the minefield of the morning commute.