I am certainly no dollar bull. Longer-term, I believe the dollar is a weak currency. But, in the here and now, it does seem to be holding up quite well. Whether this continues to be the case remains to be seen. Nevertheless, in the near-term, there are a number of events which might give us a better picture of here things are headed. Marc Chandler of Brown Brothers Harriman explains:
The dollar has not generally performed well in March. Of the G10 currencies, it has only gained against the yen and that was marginal at best. Yet the dollar’s resilence remains impressive. The recent price action is quite reminiscent of Dec 08 when after a large dollar advance, a correction phase ensued. The more then was more violent than correction in recent weeks, but it appears to be more a function of market positioning and the calendar-effect, so to speak. The point is that next week ends a quarter when fund managers and corporations often reassess portfolios, hedges and exposures. This is all the more important now because the end of March also corresponds to the end of fiscal years for some countries and companies and there have been large swings in asset prices and currencies this month.
There are several key events that promise to provide for grist for the foreign exchange mills next week.
Japan: with the central banker warning earlier today that the economy was deteriorating significantly, we should be well braced for a series of poor data, with the risk of being weaker than consensus. Employment, earnings and production figures for Feb will be reported, but the market is likely to focus more on the Tankan survey. Sharp deterioration should be expected.
Europe: The ECB and BOE meetings will overshadow the economic reports. The BOE is not expected to cut rates from the current 50 bp target. It is possible the BOE meeting comes and goes without a statement as its quantitative easing has begun but not exhausted the current programs. More interest lies with the ECB. There are two aspects of ECB policy that is not widely grasped. First, the key rate is not what is has been. It is not the refi rate but the deposit rate and it sits at 50 bp. The refi rate of 150 bp could be cut by 50, which would likely be symbolic. It could cut the deposit rate by 25 bp, but that would be it, given the distaste for zero rates. Second, the ECB has already engaged in non-conventional easing in the form of large expansion of its balance sheet. The balance sheet has shrunk from the start of the year. Th ECB may announce other measures that would expand its balance sheet again.
US: The ISM data are likely to be consistent with continued moderation of the pact of contraction, but the readings will remain in deep recession territory. Auto sales may stabilize too. But the big number is of course the jobs report. Employment is a lagging indicator and deterioration is still taking place. The risks are on the downside. Watch temporary workers though. An easing of the lay-offs there could be a leading indicator. In the coming months, government jobs may be bolstered by census workers.
The other important point to make here is that a weak jobs report does not necessarily mean a weak dollar. More often than not, during this period of substantially monthly job losses, the dollar has moved higher against the euro.
My currencies of choice remain the Norwegian Krone, and the Australian, Kiwi and Canadian dollars. In my view, the commodities bull is re-starting and that will make these currencies a better bet than the U.S. dollar or the Euro.
Marc Chandler has not missed this either:
Through the first quarter, the Australian dollar and Canadian dollar enjoy the highest correlations with the S&P 500 at 75% and 72% respectively. The relationship between the yen and the S&P 500 has broken and is a third of what it was in Q4 08. Of note, in the emerging market space the South African rand was 80% correlated to the S&P 500.
However, he cautions:
“If one believed that the S&P 500 may be sold at the start of Q2, this analysis warns that the South African rand, the Australian dollar and Canadian dollar may under-perform.”