The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Greenback Still Currency King...for Now
01/10/2012 9:15 am EST
December was a wild month in the currency markets, and while that may remain the case for the short term, further out there's a sea change taking place on the world's currency markets, write Mary Anne and Pamela Aden of The Aden Forecast.
Currencies fell sharply and all of them are now bearish. That is, they’re headed lower. Developments in the Eurozone dominated the markets. The news seemed to go from bad to worse and the euro was hammered in the process, leading the way for the other currencies.
At that point, the markets turned around. Still, the major trends are down, despite the wild swings...It’s really been fascinating, and here’s how it unfolded last month.
First, Greece and Italy
Following the resignations of Papandreou in Greece and Berlusconi in Italy, concerns about the debt crisis spread like wildfire. Interest rates basically told the story. Yields on Italian bonds surged, reflecting the higher risk in Italy. Then it spread. Interest rates in other countries started rising or moving up more quickly.
But this didn’t just happen in risky countries like Greece, Spain, Portugal, and Italy. Countries like Austria and Finland, which had nothing to do with the crisis, were also feeling the pressure.
This was a strong sign that investors where losing faith in the entire Eurozone. France, which had been holding its own, was particularly hard hit, and this added to an overall loss of confidence.
Panic Took Over
For years, French and German bonds held steady in relation to one another. But looking at the difference between these two rates, you can see French yields have recently soared. So even though France has never defaulted during the past 200 years and it has a AAA rating, it’s being thrown into the “risky country” category.
The bottom line: panic was starting to take hold. Investors, bankers, and citizens were extremely worried. That drove the currencies lower, across the board.
Everyone knew that if Europe were to fail, it would affect the worldwide global economy. This explains why countries as far away as Australia, Canada, and New Zealand were under downward pressure too.
Germany was bearing the brunt for all of the Eurozone. Increasingly, it became apparent that Germany would determine the region’s future, as well as the next direction for the global stock markets, commodities, interest rates, and precious metals.
Germany Gets a Shock
At that point, the world became very nervous. The biggest sign was the failure of Germany’s bond auction. This came as a shock because it struck at the very pillar of confidence in Germany. It reflected the first doubts.
German interest rates were rising. And while they were still much lower than rates in the risky countries, German rates were moving in the same direction, and this was a warning signal for all of the markets. That’s when the world’s central banks stepped in.
Time will soon tell. In the meantime, the currencies are bearish and the US dollar is strong. So again, do not hold any of the international currencies at this time, or at least keep these to a minimum.
Yen and Yuan
Currently, for instance, two of the few currencies that are bucking the worldwide bearish trend are the Japanese yen and China’s renminbi.
The Japanese, however, have been intervening to weaken the yen, and its days are likely numbered. In other words, it’s probably just a matter of time until the yen joins the currency bear market parade.
China is another story. They’re the world’s fastest growing economy and they have been for a long time. China has also been taking steps to build global goodwill. They’ve also been increasing their gold reserves, making trade agreements with many countries using their own currencies, and they’re looking to eventually become the world’s reserve currency.
In the US, Obama has decided to send troops to Australia, in the biggest deployment since World War II, in order to counter China’s growing influence in the region, despite the fact that Asia has been peaceful. As our dear friend Chuck Butler noted, talk about biting the hand that feeds you. And so it goes...
As we’ve often discussed, a global shift is slowly happening from West to East. It’ll probably take several years. And with US debt at unsustainable levels, the US dollar will unlikely be king over the long haul. But stay with it for now.
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