GBR Market Wrap, May 27, 2011
In this Week’s Issue
• The U.S. Dollar fell to a new record low against the Swiss Franc on Friday (Reuters)
• U.S. consumer sentiment increased to 74.3 in May from 69.8 a month earlier (Bloomberg)
• U.S. real GDP increased at an annual rate of 1.8% in the first quarter of 2011 (BEA)
• Greek opposition parties fail to agree on Papandreou’s austerity measures (Bloomberg)
• Japan’s CPI rose 0.6% from a year earlier-first annual rise in over 2 years (Reuters)
• U.S. corporate profits grew 5.3% in Q1 and are $45bn above their prior peak (Economy.com)
• U.S. personal income increased 0.4%; disposable personal income up 0.3% in April (BEA)
• CFTC charged oil trading firms with attempting to manipulate oil prices in 2008 (AP)
• U.S. durable goods orders in April 2011 decreased 3.6% to $189.9 billion (ESA)
• S&P lowered its credit outlook for Italy from stable to negative (Economist)
• U.S. new home sales up 7.3% from the revised March level but down 23.1% y/y (ESA)
• Credit rating agency Moody’s said it might cut its rating on 14 UK banks (Reuters)
• U.S. housing starts were 523,000, 23.9% below the revised April 2010 rate (ESA)
While the world has been focusing on a wide range of economic and political news this week, we saw a rather subtle but nevertheless significant development in the foreign exchange markets. The U.S. Dollar fell to yet another record low against the Swiss Franc on Friday. This came as the yield on the 10-year U.S. Treasury Note fell to a six month low of 3.05%. Whatever your sentiments about inflation may be, Treasuries aren’t pricing in any significant inflation yet and the Dollar continues to suffer.
Our weekly chart shows a comparison between historic 10-year T-Note yields versus the Dollar-Swiss Franc exchange rate. This looks quite sobering when you consider that the Dollar is now worth about one fifth of what it traded against the Swiss Franc since currencies started to freely float.
On first glance, one could fall into the correlation=causation trap since the decline in the greenback correlates strongly with the decrease in interest rates during the last three decades. But it’s not all about interest rates. Japanese interest rates have been at rock bottom for two decades and yet, the Japanese Yen has gained the upper hand versus the Dollar. Similarly, the Swiss Franc has traditionally been a low yielding currency in terms of deposit rates. As we speak, the yield on a comparable 10-year Swiss government bond is about 1 percent lower than the U.S. 10-year T-Note. Could there be another reason for the ongoing decline in the U.S. Dollar? See Video below…
In view of the long holiday week-end, we’ve decided to keep things a bit lighter than usual. If you like subtle cynicism, more common among British reporters, you will enjoy this week’s recommended read: You can’t prosecute foolishness.
Discussions about the handling of the rather alarming size of the U.S. debt continue – without much progress so far…
Some commentators have suggested that we’re not much better than some of the Club-Med countries (Greece, Portugal, Spain, Italy). Suppose the U.S. Dollar wasn’t the world’s reserve currency (which I’m not debating), how would we be different from other countries who continue to ignore fiscal responsibility?
Good luck and good investing!
Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog www.fxinvestmentstrategies.com along with a weekly newsletter.
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