Currencies Nerves Keep Building. By Katie Martin
Currencies are very jumpy right now, and it would be a super-brave or super-confident investor who ignores them.
The key sign that something is wrong comes from the dollar. For all the hand-wringing and worry that we hear from policymakers and politicians around the world, dollar weakness is actually, in many ways, a good thing.
The buck has tumbled merrily of late because investors have generally been happy. They have pulled funds out of the safe harbor of dollar-denominated U.S. Treasurys and pumped them into riskier bets, confident that the global economy is on a stronger footing.
That is now clearly reversing. The euro has declined from just over $1.50 against the dollar less than two weeks ago, to under $1.47 now.
Take a look at the Australian dollar, too. Again, two weeks ago, it was flying high against the U.S. currency, trading above $0.93 with analysts confidently predicting a sweep up to parity before too long. It's now some 4% lower.
The so-called Aussie is a neat barometer for global growth prospects. It has a hugely important trading relationship with China, which consumes a lot of its commodities exports. Bluntly, when investors are confident in the global economy, they are confident in the Aussie.
The decline in the Australian currency could reflect nothing more than a pullback in heavily stretched positive bets, especially as the end of the year approaches and funds start bundling their profits into a sack and heading home.
But it could be saying more than that, especially after the Reserve Bank of Australia crushed expectations for a third interest rate hike on the bounce next month. The RBA did raise rates by a quarter point for the second month in a row earlier this week. But it certainly didn't deliver the half-a-percentage-point raise that some had expected, and it hinted that the December hike that so many have priced in may not arrive.
Maybe, for the Aussie dollar and for a whole range of other key currencies, this is a sign that investors have pushed risky bets far too high far too fast, much faster than policymakers think is warranted.
The same applies even to sterling, which has edged lower in the past week after a surprising 6% surge against the buck in the middle of last month.
Emerging markets are showing the strain too. Monday, several key European emerging market currencies plunged for no obvious reason. The euro surged by some 2% against the Hungarian forint--the most risk-sensitive currency in the region--in a matter of minutes, before settling at a lower level. It followed a similar pattern against the zloty. The forint and the zloty haven't yet fully recovered.
Analysts at Barclays Capital said the peculiar move should not be overlooked. It was amplified by light flows in the market at the time. But the bank warned that investors appear to be nagged by doubts that the region's currencies can keep on climbing as they have been for months. There's just no fuel to keep propelling them higher right now.
These signs of stress may come to nothing. They could be a speed bump on the road to a serious global rebound. But they have been hanging around the currency markets for well over a week now, and they are echoed in stocks, with the Dow Jones Industrial Average shedding around 3% since the middle of October.
Currencies have been the canary in the coal mine before. Remember the great high-yield currency crash of July 2007? If nerves intensify further and the dollar keeps on climbing, many dollar-funded risky bets could be forced to fold, prompting a rapid and ugly unwind. That was the warning this week from prominent economist Nouriel Roubini, dubbed Dr. Doom--the man who predicted the economic crash.
Key central banks in the U.S., U.K., and euro zone have a tough job to do this week in reassuring traders that currencies are not a sign of doom ahead again. The U.S. Federal Reserve's monetary policy decision is due later Wednesday. The Bank of England and the European Central Bank are due Thursday.
Early Wednesday in Europe, some of the recent gloom lifted after the World Bank predicted that 8.4% growth in China this year will be followed by 8.7% next year. As Asian equities rallied, the euro pushed ahead to $1.4741 by 0745 GMT from $1.4721 late on Tuesday in New York.
The single currency was also up at Y133.52 from Y133.00 while the dollar rose to Y90.54 from Y90.37.
The key sign that something is wrong comes from the dollar. For all the hand-wringing and worry that we hear from policymakers and politicians around the world, dollar weakness is actually, in many ways, a good thing.
The buck has tumbled merrily of late because investors have generally been happy. They have pulled funds out of the safe harbor of dollar-denominated U.S. Treasurys and pumped them into riskier bets, confident that the global economy is on a stronger footing.
That is now clearly reversing. The euro has declined from just over $1.50 against the dollar less than two weeks ago, to under $1.47 now.
Take a look at the Australian dollar, too. Again, two weeks ago, it was flying high against the U.S. currency, trading above $0.93 with analysts confidently predicting a sweep up to parity before too long. It's now some 4% lower.
The so-called Aussie is a neat barometer for global growth prospects. It has a hugely important trading relationship with China, which consumes a lot of its commodities exports. Bluntly, when investors are confident in the global economy, they are confident in the Aussie.
The decline in the Australian currency could reflect nothing more than a pullback in heavily stretched positive bets, especially as the end of the year approaches and funds start bundling their profits into a sack and heading home.
But it could be saying more than that, especially after the Reserve Bank of Australia crushed expectations for a third interest rate hike on the bounce next month. The RBA did raise rates by a quarter point for the second month in a row earlier this week. But it certainly didn't deliver the half-a-percentage-point raise that some had expected, and it hinted that the December hike that so many have priced in may not arrive.
Maybe, for the Aussie dollar and for a whole range of other key currencies, this is a sign that investors have pushed risky bets far too high far too fast, much faster than policymakers think is warranted.
The same applies even to sterling, which has edged lower in the past week after a surprising 6% surge against the buck in the middle of last month.
Emerging markets are showing the strain too. Monday, several key European emerging market currencies plunged for no obvious reason. The euro surged by some 2% against the Hungarian forint--the most risk-sensitive currency in the region--in a matter of minutes, before settling at a lower level. It followed a similar pattern against the zloty. The forint and the zloty haven't yet fully recovered.
Analysts at Barclays Capital said the peculiar move should not be overlooked. It was amplified by light flows in the market at the time. But the bank warned that investors appear to be nagged by doubts that the region's currencies can keep on climbing as they have been for months. There's just no fuel to keep propelling them higher right now.
These signs of stress may come to nothing. They could be a speed bump on the road to a serious global rebound. But they have been hanging around the currency markets for well over a week now, and they are echoed in stocks, with the Dow Jones Industrial Average shedding around 3% since the middle of October.
Currencies have been the canary in the coal mine before. Remember the great high-yield currency crash of July 2007? If nerves intensify further and the dollar keeps on climbing, many dollar-funded risky bets could be forced to fold, prompting a rapid and ugly unwind. That was the warning this week from prominent economist Nouriel Roubini, dubbed Dr. Doom--the man who predicted the economic crash.
Key central banks in the U.S., U.K., and euro zone have a tough job to do this week in reassuring traders that currencies are not a sign of doom ahead again. The U.S. Federal Reserve's monetary policy decision is due later Wednesday. The Bank of England and the European Central Bank are due Thursday.
Early Wednesday in Europe, some of the recent gloom lifted after the World Bank predicted that 8.4% growth in China this year will be followed by 8.7% next year. As Asian equities rallied, the euro pushed ahead to $1.4741 by 0745 GMT from $1.4721 late on Tuesday in New York.
The single currency was also up at Y133.52 from Y133.00 while the dollar rose to Y90.54 from Y90.37.
- 4 November |
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