March 2013 Currency Exchange Rates

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In March the U.S. dollar appreciated “across the board:” by 3.0 percent (monthly average basis) against the euro, 1.9 percent against the yen and 1.4 percent relative to Canada’s loonie. On a trade-weighted index basis, the dollar strengthened by 0.9 percent against a basket of 26 currencies. 

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Canada: Real GDP growth regained in January (+0.2 percent) the ground lost in December (-0.2 percent). Manufacturing was the largest contributor to January’s GDP uptick even though manufacturing sales edged lower, the fourth drop in five months.

The view forward is rather cloudy. On one hand, Canada’s finance minister released a plan that would eliminate the deficit in two years by limiting spending growth (and assuming a continued economic recovery). The list of nations is very short that would be in that position and, ordinarily, such a plan would boost the loonie’s “stock.” As Everbank’s Mike Meyer put it, however, “A good portion of Canada’s expansion over the next year hinges on increased business investment since consumer spending (via retail trade) has done a lot of the heavy lifting recently.”

On the other hand, outgoing Bank of Canada Governor Mark Carney renewed his commitment to maintaining the country’s “ultra low” interest rates. According to strategists at both UBS and Citigroup, international investors have responded to the news by starting to move out of the Canadian dollar in search of higher yields. Strategists have cut their estimates for the loonie by over 2 percent during the first quarter. Those expectations may soften further if investors begin to suspect Canadian banks are in trouble and take seriously the possibility of a forced, Cyprus-style “bail-in” (see Europe section below) from depositors’ accounts.

Europe: The euro took a real hit after the European Commission’s leadership decided to recapitalize Cyprus’ troubled banking sector by confiscating bank depositors’ funds (known as a “bail-in”). Details have been very fluid, but (at the time of this writing, at least) it appears that accounts containing more than €100,000 will have 60 percent of the funds in excess of that €100,000 threshold transferred to ownership by the bank in which the funds are deposited.

Originally billed as targeting the offshore funds of wealthy, tax-evading Russians, the policy has instead devastated Cypriot businesses and senior citizens who retired to the island with their life savings. In fact, Russian citizens appear to have been among the least affected; they used Russia-based branches of Cypriot banks to repatriate their cash during the bank holiday. Many politically well-connected Cypriots also escaped essentially unscathed, perhaps including the current President Nicos Anastasiades himself. Anastasiades’ family businesses allegedly transferred “dozens of millions” from their Laiki Bank accounts to London a week in advance of the depositor haircuts.

Now that what was done to Cyprus may be replicated elsewhere in Europe (and even Canada, as noted above), keeping funds in any Eurozone bank is becoming a riskier proposition. Unless and until faith is restored in Europe’s banking system, the euro could continue to weaken against the dollar.

Japan: Data out of Japan was a mixed bag: Although GDP was revised to show modest growth (+0.2 percent, from the previous estimate of -0.4 percent) during the final three months of 2012, core machinery orders fell 13.1 percent in January (relative to December). The country’s February trade balance ran a deficit for an eighth month (the longest spell since 1980) and, by some accounts, hit a seasonally adjusted all-time high deficit. Moreover, Japan's industrial production confounded expectations for a sizeable gain and instead showed a surprise contraction (-0.1 percent) in February.

With the Tankan survey of business sentiment showing broad pessimism among large Japanese companies during the January-through-March period, and the government pledging to implement policies that weaken the yen, we see no real reason for the yen to reverse course against the dollar.

China: The debate continues over whether China’s economy is expanding or contracting. HSBC’s Flash PMI for China printed above expectations at 50.4 (50 is the breakpoint between contraction and expansion), but February’s year-over-year change in electricity production calls that assumption of modest expansion into question. The PMI posted for March came in at 51.6, though, which caused Everbank’s Chuck Butler to conclude “the Chinese recovery is being sustained [which is] a good thing for global growth.” Bloomberg was less enthusiastic, observing that China’s economic data show the weakest start since 2009.

Of greater implication for the dollar is the revelation that Australia and China have entered into a trade agreement enabling direct convertibility of the Australian dollar into Chinese yuan, without U.S. dollar intermediation. Past deals between China and other countries involved currency swap arrangements, so the outright convertibility of the yuan and Australian dollar is unique -- for now. This is just the latest of many steps China has taken in the past few years to chip away at the U.S. dollar’s reserve currency status.

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.