Dollar fades despite bombs and missiles

Dollar fades despite bombs and missiles
US consumer confidence sharply higher
Sterling heads into resistance zone.

Good morning. You can tell the US dollar is out of favour when missile tests and even nuclear explosions are not enough to send it higher. Not so long ago a North Korean rocket would have investors - especially Japanese investors - scurrying for the safety of the dollar. There has been none of that in the last couple of days. The United Nations Security Council has complained but the market is unmoved.

If the threat of a South East Asian war was not enough to motivate dollar buyers there was no chance of the ecostats doing the job. It did look for a while in the morning as though the dollar might be in for a bit of a rally after losing ground last week. During the first couple of hours it added a cent against the pound and the euro. But conviction was lacking among investors. By lunchtime they had decided to seek their fortunes elsewhere. The dollar had to hand back its morning gains and it continued to drift lower overnight.

It did so despite a 40% jump in the Conference Board's index of US consumer confidence. The index rose from April's 39.2 (40.8 after adjustment) to 54.9 in May. The Case-Shiller metropolitan house price index fell by a slightly more than expected 18.7% in the year to March but that was not a bad enough number to account for the continued exodus from the dollar. Not was there any endogenous reason for the Yen's loss of ground. Like the dollar, it went down because investors are more scared of bank failures than nuclear missiles and nobody is doing bank failures this week.

The absence of that fear factor worked in sterling's favour, as it also did for the commodity dollars and other risky assets. The Canadian dollar was the best performer among the main-stream currencies, closely followed by the Aussie.

Given the complete absence of any correlation between economic data and currency performance recently (there was none from Canada, Australia or Britain yesterday) it seems pointless to bother about today's agenda. Nevertheless, tradition demands it: We can look forward to German inflation, French and Italian consumer confidence, UK mortgage approvals (the BBA version), US existing home sales and the government's house price index. Pick the bones out of that lot. There, told you it wasn't worth bothering with.

On the other side of that coin it is also fair to observe that there is nothing on the timetable likely to thwart sterling's effort on the upside. What it does have to worry about, however, is the proximity of psychological resistance for cable and technical resistance for sterling/euro. The November low and the February high are only a cent or so away and will inevitably give sterling buyers reason to consider taking some of their profits. History says the pound will fall back yet again but last week's experience shows what might happen if it does not.

Krugman wonders where the recovery will come from

No movement over holiday weekend -
Krugman wonders where recovery will come from-
Little inspiration in today's data.

Good morning. A pensioner in Guangzhou, China, lost his patience after being held up yet again in a traffic jam caused by a man threatening to jump off the Haizu Bridge. Police had set up a giant airbag to catch the would-be suicide but after five hours he was still there and the road remained blocked. The Bad Samaritan decided enough was enough. He climbed up to the woolly jumper and shoved him off to a soft-ish landing on the airbag.

The non-jumper survived the fall but doctors cannot be sure how rapid his recovery will be. The same seems to be true of the global economy. Nobel prize-winning economist Paul Krugman has been one of the more prominent pessimists, saying a couple of months ago that "in the end..." the US government would have to "seize" big banks. That has not yet come to pass and Professor Krugman now feels that "the freefall has come to an end, that we've stabilised, and probably the worst of the shocks is over." On the other hand, his "big concern is that we don't hit the bottom and bounce, we hit the bottom and stay there. It's not obvious where the recovery comes from." Most of the indicators are still in the slowdown zone. They might be looking less horrid than they did a month of two ago but there are no signs of a rebound.

As expected, Friday's update kept Britain's GDP shrinkage at 1.9% in the first quarter. Any positive impact from a small improvement in Canadian retail sales was spoiled by a decline in sales excluding automobiles. IFO's survey of German business leaders, published yesterday, showed that while firms are slightly more optimistic for the future they are even less happy about current conditions than they were a month ago. Pretty well the only upbeat sentiment to be found over the last few days was among those British and US residents who were enjoying an extended bank holiday weekend.

If there was little currency movement on Friday there was even less yesterday. One-cent ranges were the order of the day and sterling's net change in the last 96 hours is no more than half a cable cent - or equivalent thereof - almost everywhere you care to look. There was a frisson of excitement among sterling's supporters this morning when Germany published Q1 GDP figures that made Britain's look good; -3.8% q-o-q and -6.9% y-o-y. The flurry did not last long once everyone realised these were just unchanged updates of the earlier estimate. Further down the list come Swiss unemployment, Euroland current account and industrial new orders for March. In the States the Case-Shiller house price index is probably still falling at more than 18% a year, consumer confidence will surely still be lacking and the Richmond Fed's manufacturing index probably still has a minus in front of it. With no UK data on the agenda the pound will be left to flounder or founder. Which will it be?

Source Moneycorp
26th May 2009