FANTASTIC VOYAGES: THE US DOLLAR AND COMMODITY CURRENCIES © Leo Haviland April 3, 2016
In the 1966 movie “Fantastic Voyage”, the character Cora declares: “We’re going to see things no one has ever seen before. Just think about it.” (Richard Fleischer, director)
In “On the Road” (original scroll version), Jack Kerouac writes: “But no matter, the road is life.”
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CONCLUSION AND OVERVIEW
The substantial rally in the broad real trade-weighted United States dollar (“TWD”) that embarked in mid-2011 played a key part in encouraging (confirming) and accelerating bear movements in emerging marketplace stocks and commodities “in general”. The S+P 500’s majestic rally over its spring 2011 interim high diverged for about four years from the trends in emerging equity realms and commodities. However, the TWD’s 2015 ascent above its March 2009 peak was a crucial event; this dollar climb helped propel the S+P 500 downhill following its 5/20/15 pinnacle at 2135 in conjunction with the emerging stock marketplace and commodity trends.
In January/February2016, these linked price patterns partly reversed. The TWD has depreciated and stocks (emerging marketplaces as well as those of America and other advanced nations) have rallied. Commodities (particularly oil) jumped. The benchmark United States Treasury 10 year note yield ascended from its low. This relatively unified reversal across marketplace sectors paralleled the entwined moves since mid-to-late 2015. Highly accommodative central bank rhetoric and action by the Federal Reserve Board and its allies aimed at achieving their targeted two percent inflation destination will continue for an extended period. For example, note the Fed’s 3/16/16 meeting and its Chairman’s very dovish speech, “The Outlook, Uncertainty, and Monetary Policy” (3/29/16). Underline the expansion of the European Central Bank’s easing scheme (most recently 3/10/16) and the lax policies of the Bank of Japan. Consequently, the current marketplace interrelationships (“roughly trading together”) probably will persist for the near term, regardless of whether the pattern of mid-2015 to first quarter 2016 resumes or that since mid-first quarter 2016 continues. Marketplace history of course need not entirely or even substantially repeat itself.
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Concentrating on and comparing exchange rates of “commodity currencies” alongside the broad real trade-weighted dollar trend offers additional notable insight into the assorted interconnected marketplace relationships. Commodity currencies, associated with countries with large amounts of commodity exports, are not confined to developing/emerging nations. Because commodity exports are significant to the economies of advanced countries such as Australia, Canada, and Norway, the currencies of these lands likewise can be labeled as commodity currencies.
The bearish currency paths (effective exchange rate basis) of important emerging and advanced nation commodity exporters up to first quarter 2016 resembled the similar trends among them during the 2007-09 worldwide economic disaster era. However, these commodity currencies depreciated notably more in their recent dive than during the 2007-09 turmoil. In addition, the lows attained by most of them decisively pierced the floors achieved about seven years previously. Moreover, the TWD rallied more sharply in its bull move to its January 2016 elevation than it did during the past crisis.
The feebleness in recent times for the commodity currency group, as it involved both advanced and emerging marketplace domains (as it did in 2007-09), reflected an ongoing global (not merely emerging marketplace) crisis. Substantial debt and leverage troubles still confront today’s intertwined worldwide economy. The bear trip of many commodity currencies into early first quarter 2016, especially as it occurred alongside big bear moves in emerging marketplace stocks (and in the S+P 500 and other advanced stock battlefields) and despite long-running extremely lax monetary policies, underlines the fragility of the relatively feeble global GDP recovery.
Thus noteworthy rallies in these commodity (exporter) currencies from their recent depths will tend to confirm (inspire) climbs in commodities in general and emerging (and advanced) nation stock marketplaces. Renewed deterioration of the effective exchange rates of the commodity currency fraternity “in general” likely will coincide with renewed firming of the US dollar. Such depreciation in the commodity currency camp probably will signal worsening of the current dangerous global economic situation and warn that another round of declines in global stock marketplaces looms on the horizon.
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Therefore key central bank captains, concerned about slowing real GDP and terrified by “too low” inflation (deflation) risks, have fought to stop the TWD from appreciating beyond its January 2016 top and struggled to encourage rallies in the S+P 500 and related stock marketplaces. Yield repression (very low and even negative interest rates) promotes eager hunts for yields (return) elsewhere. Indeed, rallies in the S+P 500 (and real estate) may help inflation expectations (and inflation signposts monitored by central banks such as consumer prices) to motor upward. Given their desperate quest to achieve inflation goals, central banks probably approve of at least modest increases in commodity prices in general.
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Fantastic Voyages- the US Dollar and Commodity Currencies (4-3-16)