Employment, Inflation and Trade Data Leave Dollar Vulnerable
US headline PPI came in somewhat higher than expected at 0.4%. Weekly initial jobless claims were a bit stronger than expected and the US trade deficit was wider than expected. The trade balance, adjusted for inflation, is used to calculate GDP and there was a sharp widening of this deficit measure, which warns that, if anything, economists may have to revise Q3 GDP forecast down. The real deficit widened to $51.2 bln from $47.3 bln and an average of $47.9 bln in Q2. The wider trade deficit is not due to the stalling of exports. US exports hit a 2-year high. This includes the $1.7 bln slump in US commercial aircraft exports. Core PPI was tame with a 0.1% increase and is unlikely to stand in the way of new round of asset purchases.
The dollar remains vulnerable, but is over-extended after the overnight slide and players are more inclined to sell a bounce than chase it now.
“No Devaluations
It is factually wrong in the sense that there has been no recent currency devaluation in any country that is known or suspected to have intervened. In fact, the emerging Asian currencies (leaving aside the Hong Kong dollar) have all risen against the US dollar this year.” – Currency Wars: A View from the Trenches – Marc Chandler, October 10, 2010
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Marc, I think you’re generally right.
However it does not take a lot of movement when the globe is pre-stressed and impaired and already weakening, or else stalled. But nevertheless, new-highs and new-lows have been consistently made for two months now, and CBs are clearly printing and buying.
But it seems to me USD printing since about early 2008 has still not been transmitted to devaluation, and that is what Hussman warned of in August.
Hussman:
Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar, August 23, 2010
https://www.hussmanfunds.com/wmc/wmc100823.htm
“…Frankly, I’ve always thought Dornbush’s use of the word “overshooting” was unfortunate, because it implies that the exchange rate move is an overreaction, when that is not at all the case. Overshooting refers to the tendency of the spot exchange rate to move beyond its long-term PPP value, but this move is in fact appropriate, efficient, and required in order to align the returns that investors can expect in each currency. So it is important to avoid misinterpretation – the policy of quantitative easing is likely to force a large adjustment on the U.S. dollar because the Federal Reserve is choosing to lay a heavier hand on the Treasury bond market than would result from economic conditions alone. The resulting shift in interest rates and long-term inflation prospects combine to dramatically reduce the attractiveness of the U.S. dollar. A significant and relatively abrupt devaluation is then required, in an amount sufficient to set up expectations of a U.S. dollar appreciation over time. …”
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The other issue is the Fed’s POMO activity is pumping stocks, and then commodities ramp, as people bailout of stocks into physical stuff. Plus all the QE talk and speculative effect on commodities, ramps industrial inputs for exporters, especially in Asia.
These combined are enough.
Not a ‘currency war’, but a good start. The NET effect of CB printing and buying and indirect-monetizing of debt is being expressed in secondary repercussions that are just as damaging to exporters. So it is being transferred.
But what Hussman says disturbs me more than outright levels, because printing can occur for a long time with little movement then suddenly a jump-adjustment can occur, that can’t be mitigated, but is a shock impulse.
That lag is the danger – for everyone.
If Hussman (and those he cites) turns out to be about right about a necessary USD adjustment, and its scale, this will certainly be seen as a ‘currency war’ as it occurs – right?
So currency phony-war?
Consider the BOJ sitting there wondering if or when a jump-adjustment downwards for the USD is going to occur from all of Uncle Ben’s apple sauce monetizing that will surely come.
I’d say they’re expecting a greater devaluation to come – ala phony-war of winter 1939-40 turns into Dunkirk clobbering thereafter after.
I think of the current relative levels and trends as a bit like the CMI water-gauge metaphor where a flood has been measured upstream but hasn’t washed through the delta as yet.