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| Daily Jurojin - Tuesday, June 16, 2009 |
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Tuesday, June 16, 2009 The trouble with inequitiesThey used to say that all is fair in love and war. That same expression might be applied to economic good times and bad. The tumbling dollar economy decimated the fortunes of every other global market. A U.S. led revival gave rise to an inkling of resurgent demand sending the fortunes of currencies of those nations anticipated to benefit sky high. Several economies reliant on exporting raw materials are now staring at an abyss after their respective currencies have scaled dizzying heights.Commodity prices had until last week roared ahead spurred on by what appeared to be a rebound in Chinese manufacturing growth. As we noted in Monday's Daily Jurojin, there are reasons to be concerned for the longevity of such a turnaround. The rebound in May for the CRB Reuters Jefferies commodity price index was the strongest in 35 years. Meanwhile the rise in the commodity dollars of New Zealand, Australia and Canada was the greatest since 1971 and that's creating concern from each central bank while trade groups are starting to howl louder than a pack of hungry coyotes. The Canadian dollar has risen 12% so far during the second quarter, while the New Zealand dollar or kiwi has risen an unlucky 13%. Meanwhile the Australian dollar seems to have been the most gregarious of the bunch finding common friendships amongst global investors who sent its value up a neat 16% so far. With the return of risk appetite fuelling appetite for incrementally higher yields, the yields on kiwi and Aussie denominated government 10-year notes appear far more attractive than their U.S. counterparts. At 5.96% and 5.49% those bonds pay a healthy premium over U.S. paper, and add in the appreciating currencies and you have quite the investor bonanza. The Australian treasury secretary recently remarked about the strength of the Aussie dollar that if the real exchange rate was maintained looking ahead, it would imply some downside risk to the economy. The prospect of resurgent Chinese demand for raw materials hiding behind the veil of government stimulus has boosted the outlook for Australia, whose exports to Shanghai are the largest from a single nation. The domestic capability of the Australian economy has also kept it afloat and spared it the official definition of recession. The Canadian central bank governor, Mark Carney continues to comment on the rapidly rising Canadian dollar. He says that the strength runs the real risk of stifling any recovery to date. But you have to feel most sorry for the New Zealanders, where four consecutive quarters of contracting growth make for the least deserving bout of currency strength. Sadly, investors have the kiwi in the wrong shopping basket and overlook the dire straits the domestic economy is in. New Zealand's central bank governor, Alan Bollard termed the kiwi's rise as 'unhelpful and a real risk to New Zealand.' Trade groups in each nation are complaining that the signs of demand abroad are passing them by as they struggle to maintain overseas sales in the face of rising domestic currencies, making it hard to compete. In addition profits at many companies remain extremely sensitive to a shift of just a penny against them, translating quite literally into millions of lost dollars. It's no wonder that the G8 world leaders appear to be taking a similar stance when it comes to the role of the American dollar. With some leaders going to great pains to testify in favor of the Obama administration's policies as well as the path taken by the Federal Reserve, it's becoming increasingly apparent that the world not only needs a stronger greenback, but also that other nations won't survive if a falling dollar trajectory is maintained. The next step could see lower domestic interest rates in those commodity-rich nations as the central banks deal with sagging domestic demand and rising unemployment. If that doesn't help, it won't surprise us to see a round or two of collaborative currency intervention aimed at restoring further confidence in the U.S. unit. The Supreme Council of the Secret Order of Jurojin |
