Gains for the U.S. Dollar in the Near Term?

February 8, 2010
by Asha Bangalore

The Financial Times reports today, "Speculators make €8bn bet against euro" that markets are testing the euro with a nearly €8 billion bet against it. The ECB is the sole authority in place to defend the currency because there is not a single government to protect the currency. The current hue and cry is about the ECB's failure to articulate a broad strategy to enforce fiscal restraint within the single-currency area, not any one country per se. The case of Greece and the others, Italy, Portugal, Spain, and Ireland, is convenient to highlight this concern. In this current market environment, there is a strong possibility of the dollar recording a near term gain. The U.S. dollar has appreciated 5.6% vis-à-vis the euro in the four weeks ended February 5. Between the high in April 2008 and low in October 2008, the U.S. dollar rose nearly 29% vis-à-vis the euro.

With somewhat of an overlap in terms of the time span, between March 2008 and March 2009 (see chart 2), the trade weighted dollar rose 25% (69.2775 on March 17, 2008 vs. 86.0917 on March 9, 2009). During the past four weeks, the trade weighted dollar has moved up nearly 2.0%. The rally underway will most likely be smaller than the flight-to-safety rally of the 2008/2009.

Will Japan Finally Join Asia's Economic Recovery?

By James Pressler

While most of Asia is talking about recovery and the inevitability of higher interest rates, Japan is still contemplating whether its own recovery can gain traction and the risks of slipping back into negative growth - in short, the same issues that have plagued the country for years. The markets are already debating how much momentum the economy has, and next week's release of Q4 GDP should move the consensus into either the bear or the bull camp. From what we see at this time, we are not getting our hopes up.

Japan's economic performance can be assessed by a handful of indicators, and right now two particular datasets stand out - core capital expenditures and the goods trade balance. Our bearishness comes from core capex, which we measure through the proxy of private machinery orders less volatile components. While it is evident that the worst of the drought in capital investment has passed, machinery orders have not posted quarterly growth since Q1 2008 and estimates for Q4 2009 are not too encouraging. A flat q-o-q figure for Q4 machinery orders would please most market-watchers, but we think it will be closer to the -0.9% posted in Q3 and therefore not a contributor to faster GDP growth. 

The trade balance is a slightly different creature, and offers some hope that Q4 was not a wash. On a quarterly basis, export growth only began exceeding import growth in Q2 2009, returning the trade balance to positive territory. The Q4 surplus did not quite reach the ¥2 trillion level synonymous with neutral growth, but we believe that this year it will be more supportive of economic expansion. 

After 0.3% GDP growth in Q3, the consensus forecast for Q4 is 0.9% (3.7% annualized), which would be the strongest rate since the beginning of 2008. Admittedly, our Japan outlook has rarely been very optimistic, but we have a particularly difficult time reconciling such an outlook with the data already released. Trade will offer a fillip to growth, but we think a 0.6% on-the-quarter figure is more appropriate, with the possibility of error weighted toward the downside. Looking into 2010 we see this playing out even more so - net exports providing most of the growth while the domestic economy struggles to gain momentum. At least in that regard, this year should be more of the same.