November 2012 Currency Exchange Rates

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The U.S. dollar appreciated “across the board” in November against the three currencies we track: by 1.1 percent relative to Canada’s loonie, 1.4 percent against the euro, and 2.1 percent against the yen. On a trade-weighted index basis, the dollar strengthened by 0.7 percent against a basket of 26 currencies.
 

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Canada: The loonie gave up ground against the greenback as Canada’s real GDP growth remained unchanged in September after edging down 0.1 percent in August. Confidence may also have been shaken a bit after Finance Minister Jim Flaherty said he will delay plans to balance the federal budget by one year. Flaherty's latest budget update projects a return to a balanced budget by 2016. "Our country is not immune to global forces,” Flaherty said, “nor can we control the economic shocks that ripple outwards from other nations." The loonie stayed at parity with the U.S. dollar, however, at least partly because manufacturing sales advanced 0.4 percent in September.

Europe: The euro weakened as Europe’s long-running debt crisis dragged the 17-nation zone back into recession. Eurozone GDP shrank 0.1 percent in 3Q compared to 2Q, for an annualized contraction of around 0.4 percent. That followed a 0.2 percent quarterly contraction during 2Q. A recession is often defined as two consecutive quarters of shrinking GDP.

On a national basis, German growth slowed less than expected, to 0.2 percent from a 0.3 percent 2Q pace. By contrast, France rebounded with 0.2 percent growth after a 0.1 percent contraction during 2Q. Italy remained mired in recession, but the pace of the contraction slowed to 0.2 percent after shrinking 0.7 percent in 2Q. Likewise, Spain contracted 0.3 percent after shrinking 0.4 percent the previous quarter.

The euro’s depreciation might have been even more dramatic were it not for Greece’s institutional lenders reaching a deal that was touted as paving the way for the country to receive almost 44 billion euros of financial aid while bringing its debt down to a sustainable level. “Greece has shown that it is serious about reform” and has kept to its commitments, European Commissioner for Monetary Affairs Olli Rehn said. “Greece has already come a very, very long way.”

As we have been stating for quite some time, Europe’s problems are hardly over; one should not be deluded into thinking this latest “tire patch” has restored the region to economic health. In fact, a serious case could be made that the worst is yet to come. Spain, Italy and even France are still on a downward slope and likely will be for some time to come.

Japan: The announcement of yet another round of quantitative easing by the Bank of Japan contributed to the yen’s depreciation against the greenback in November. That weakening was likely also helped by uncertainty over the results of upcoming elections in Japan. The yen is widely considered a safe-haven currency, but economic fundamentals suggest that perception is flawed.

Caixin contributor Andy Xie identified three current developments that strengthen the case for the yen’s day of reckoning.

* Japan’s corporate sector has deteriorated so much that its well known companies may go bankrupt. If these companies do go under, the contraction of Japan’s economy could accelerate, increasing the likelihood of a financial crisis.

* The fiscal situation has reached some hard limits. The latest fiscal stimulus package is 0.1 percent of GDP. It is laughably small and unlikely to make any difference.

If the government could do a bigger one, it is likely to do so. The fact that the government is reduced to doing symbolic fiscal stimulus suggests that no more is possible. Hence, there is no offsetting factor against a strong yen in propping up the economy.

* The territorial dispute with China kills Japan’s dream of growing out of its problems. The dispute is unlikely to be resolved soon.

Chan Akya essentially concurred with Xie when concluding in a recent Asia Times article that, “recent events, ranging from the declining fortunes of electronics majors to the uncertain policies around power consumption and generation, may well mean that Japan is on its last stretch as a major global economy.”

China: Data releases are providing mixed messages about the health of China’s economy. Although HSBC/Markit’s flash manufacturing PMI jumped into expansion territory in November for the first time in 13 months, the services PMI -- while still expanding -- dropped to its lowest reading in 15 months. The conflicting data caused blog site Zerohedge to reproduce a lengthy excerpt of an article by Michael Pettis speculating on whether China has truly “bottomed out.”

In other developments, China’s leadership continues to push forward on renminbi convertibility. These steps would make the renminbi more attractive for cross-border trade, thereby eroding the dollar’s position as the world’s reserve currency. Although the process is likely to progress very slowly, we expect the dollar to gradually depreciate relative to the renminbi.


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.