May 2013 Currency Exchange Rates

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In May the monthly average value of the U.S. dollar appreciated against the three major currencies we track: by 3.1 percent relative to the yen; 0.3 percent against the euro, and 0.1 against Canada’s loonie. On a trade-weighted index basis, the dollar strengthened by 0.5 percent against a basket of 26 currencies. 

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Canada: As indicated by the negligible shift in the exchange rate, the relationship between the Canadian and U.S. economies remained relatively stable during May. Canadian real GDP expanded at an annualized rate of 2.5 percent in 1Q2013 (2.4 percent between February and March), the fastest pace in six quarters. Exports (especially of mining and oil and gas extraction) were the largest contributor to growth during 1Q; about the only negative readings involved declines in residential investment and manufacturing sales. Interestingly, the bulk of the drop in manufacturing sales were confined to petroleum and coal products, and chemical manufacturing industries. We infer from those two (potentially, at least  somewhat contradictory) data points that the drops in coal and chemical manufacturing must have been particularly steep.

Europe: Frankly, we have about given up trying to understand why the euro remains as strong as it is given the abandonment of any serious attempts to rein in member countries’ deficits, and the lousy fundamentals of the European economy. As to the latter, Markit's flash Eurozone Services PMI rose in May to 47.5, a three-month high, from 47.0 in April. Apparently, as CNBC indicated, “that was a little better than economists polled by Reuters expected, [but] the PMI has now spent 16 straight months below the 50 mark that divides growth and contraction.” French companies continued to fare poorly in May, while activity in German firms effectively stagnated.

The story for the manufacturing sector was much the same; the manufacturing PMI rose to 47.8 in May (from 46.7 in April) -- thanks to new orders and output declining at a slower pace -- comfortably beating expectations of 47.0 predicted by economists. Combining both the services and manufacturing reports, the composite PMI hit a three-month high of 47.7 in May, compared with April's 46.9, while showing continuing job losses.

The only explanations we can fathom are that the euro is an anti-dollar currency, and that conditions in the United States (including the government’s management of the economy) are really no better than their European counterparts.

Japan: The tremendous infusion of funds via the Bank of Japan’s monetary policy easing appears to be having the desired effect: Japan's consumer prices swung 0.3 percent higher in April compared to March, although they remained 0.4 percent below year-earlier levels. As a result of more favorable currency exchange rates, industrial production rose 1.7 percent in April. "Most of the data looks quite good and the industrial production..is encouraging," said Kim Eng Securities strategist Andrew Sullivan. "CPI data seems to be improving, but there is a long way yet to go."

As we stated last month, however, 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.” Christine Hughes of OtterWood Capital Management is equally pessimistic about the end result of Japan’s monetary policy experiment, and explained her position in a very well-done video presentation entitled The Math Is Stacked Against Japan -- It's Not 'If', It's When.

China: Depending upon whom one wants to believe, China’s manufacturing sector either contracted or expanded in May (HSBC’s flash China manufacturing PMI claimed contraction, while official estimates showed marginal expansion). Separately, some are beginning to wonder if China is approaching a “Minsky moment” (i.e., a sudden, major collapse of asset values). In an article reproduced on the ZeroHedge website, analysts at Société Générale point out that a non-negligible share of the corporate sector and local government financial vehicles are struggling to cover their financial expense. At the macro level, they estimate that China's debt servicing costs have significantly exceeded underlying economic growth. As a result, the debt snowball is getting bigger and bigger, without contributing to real activity.

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.