April 2013 Currency Exchange Rates

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In April the monthly average value of the U.S. dollar appreciated against the yen (by 3.1 percent) but depreciated against the Canada’s loonie and euro (both by 0.5 percent). On a trade-weighted index basis, the U.S. dollar weakened by 0.3 percent against a basket of 26 currencies. 

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Canada: The loonie benefited from expansion in several sectors (especially mining quarrying, and oil and gas extraction), which kept real GDP growth at 0.3 percent in February. Currency markets seem content to leave the loonie bouncing around on either side of parity with the greenback, and we see no real impetus for change.

That doesn’t mean our neighbors to the north have nothing to worry about, though. Sober Look compiled some useful news clippings that center around the need for more deleveraging by Canadian households. At the same time international forecasting firm Capital Economics says Canadians should brace for another two years of tough economic times that will once again lift the jobless rate above 8 percent and frustrate Ottawa's plans to balance the budget.

Europe: We had expected the euro to weaken against the U.S. dollar in the wake of Cyprus’ banking crisis and news of contracting private sector business activity across the Eurozone (including Germany), but the opposite happened instead. The euro could get an additional short-term boost from the European Central Bank’s latest 0.25-percent rate cut.

Japan: The yen has depreciated significantly since the Bank of Japan (BOJ) unveiled its latest quantitative easing (some would call it “currency debasement” or “mass inflation”) plan to boost the inflation rate to 2 percent by doubling the monetary base in two years. In a case of the “pot calling the kettle black,” the U.S. Treasury warned the BOJ "to refrain from competitive devaluation and targeting its exchange rate for competitive purposes." Granted, the policy is still in its infancy, but core consumer prices slid 0.5 percent relative to a year earlier in March. Moreover, some believe Japan will not experience price inflation until 2015 unless even more stimulus is implemented. We agree with Mish Shedlock, that the BOJ’s inflation-encouragement policy “will eventually succeed in spades and [Japan] will be extremely unhappy with the result once it happens.”

China: Hopes that that China could propel global growth forward appear to be waning with each successive data release (see this, this, this, this and this). Because of fear China is repeating Japan’s mistakes, and with total credit outstanding expected to rise to 240 percent of GDP in 2013 (and at an even faster pace thereafter), Fitch Ratings became the first major rating agency to cut China’s local currency rating since the late 1990s. Moreover, China’s senior auditor Chang Ke warned that “out of control” local-government debt could spark a bigger crisis than the U.S. housing crash.

That hasn’t discouraged other countries from “cozying” up to China, however. E.g., Australia's central bank is “committing to plunk down 5 percent of its foreign exchange reserves on Chinese government bonds.” In addition, the latest attempt at yuan internationalization involves France’s intention to compete with London by setting up a currency swap line with China; the move would make Paris a major offshore yuan trading hub in Europe.

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.