October 2012 Currency Exchange Rates

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The U.S. dollar gave a mixed monthly average performance in September against the three currencies we track: the greenback appreciated by 0.7 percent relative to Canada’s loonie and 1.0 percent against the yen, but depreciated 0.7 percent against the euro. On a trade-weighted index basis, the dollar weakened by 0.3 percent against a basket of 26 currencies.
 

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Canada: The loonie managed to stay stronger than parity with the greenback on a monthly average basis, thanks primarily to solid manufacturing growth. However, the currency weakened relative to September’s level under the triple influence of relatively low (1.2 percent) year-over-year inflation, Bank of Canada Governor Carney essentially eliminating the possibility of a rate hike in the near future, and the lagged effects of an August downturn in GDP growth -- the first monthly decline since February.

As for the Canadian forest products industry, more than 65 major capital and maintenance projects worth US$2.9 billion are ongoing across the country; individual projects range in value from $500,000 to $360 million. The solid wood sector has only 10 projects worth $140 million, while the remaining activity will take place at pulp and paper mill sites.

Europe: The euro inexplicably strengthened during October despite the pummeling it received from weakening fundamentals and Moody’s downgrading the debt of five Spanish regions. We suspect concerns over the U.S. fiscal cliff may have contributed to the euro’s appreciation.

Japan: As others have observed, the Japanese economy continues to be “a bug in search of a windshield,” but the country’s currency has remained surprisingly buoyant. Only time will tell whether we are witnessing just more white noise in the currency markets or the beginning of a trend, but the yen weakened in October under the combined weight of slumping exports, plans by the Bank of Japan to introduce yet another round of stimulus, and demographic trends that are eating away at the population’s traditionally high rate of saving.

China: Various data sources paint conflicting pictures of the Chinese economy. Although GDP growth was slower in 3Q than 2Q, official industrial production and retail sales numbers for September suggest the economy may be turning a corner. Electricity production tells a different tale, however; September’s output was down 11 percent from August (a four-month low) and up just 1.5 percent from a year earlier.

China and other countries are actively chipping away at the U.S. dollar’s reserve-currency status. Not only is China “no longer ‘hoovering’ up dollar reserves with its past abandon,” but more currencies have a higher degree of co-movement with the renminbi than with the greenback. We expect this trend to continue; while the dollar’s diminished influence will mean higher costs for goods imported into the United States, U.S. manufacturers will be more competitive in both domestic and global markets.


The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.