Currency Watch: Mid-Month Market Analysis
Editor's Note: Currency Watch is a TransWorld Business franchise focusing on tools to manage your businesses' bankroll internationally. Understanding global financial markets is paramount in competing in today's business world and this series will be your home for ongoing updates to stay ahead of the game. We've partnered with former pro surfer and GPS Capital Markets Account Executive Nate Carroll to guide us on our monthly world tours.
U.S. Monthly Trends
In November, the United States unemployment rate dropped to the 7% mark, our lowest level since 1985, and matching the Federal Reserve's tapering threshold. Meanwhile, GDP grew by 2.8% and the U.S. government finally agreed upon a 2-year budget deal to curb short term spending. Moreover, as the federal minimum wage is set to increase beginning January, we should start to see it reflect in higher retail sales during the holidays.
North of the border, the Bank of Canada's governor Stephen Poloz said interest rates would remain unchanged for "quite some time" due to slower than anticipated economic growth. Furthermore, following this announcement interest rate advantages for two-year Canadian bonds dropped 77 basis points indicating lack luster investor sentiment. During the past few days the loonie traded between the 1.04 to 1.08 range before leveling off near the 1.06 figure
In January, the Canadian dollar faces immense pressure as the gradual erosion of short-term investment yields between Canada and the U.S. unwind. If current condition persists we could see the loonie touch levels near the 1.07's during the first month of the year.
Moving south, the Mexican government announced this week that Mexico has signed into effect a new energy reform thus ending the 75-year state run oil monopoly. For the first time in Mexico's history, foreign investors will be allowed to drill and export Mexico's vast oil reserves which could bring in as much as $20 billion dollars or more in foreign revenue. Following this announcement the peso gained 39 basis points against the dollar before leveling off near the12.8 figure. We set a December target price in the 12.10 range.
In South America, Brazilian swap rates declined to a one-month low after economists reduced their inflation forecasts for 2013. Since August 22, 2013, the Brazilian real has gained more than 10 percent on the dollar before ending the week near the 2.33 zone. Disappointed, Brazilian policy makers have reduced their 2013 GDP forecast this year from 2.35% down to 2.3% indicating that the Brazilian economy is still faltering thus we have an estimated January price in the low 2.3 range.
The euro gained modestly against the dollar these past few weeks touching the 1.37 range after reports showed Italy's industrial production expanded in November indicating the economy stopped shrinking and on the road to recovery. While the chances for the ECB to lower deposit rates for European banks remains slim, we believe the euro could hover near or at current levels setting a resistant cap of around the 1.38 figure.
In England, the British pound (GBP) retracted some of last month's gains as the Fed Reserve looks to end stimulus sooner than previously forecasted. Presently the GBP is trading near the low 1.6's but should trend back up as reports come in indicating that UK economy is on the road to recovery setting a January price in the 1.07 range.
On Tuesday, December 3, 2013, China's yuan overtook the euro to become the second-most used currency in the world for global trade finance acquiring a market share of roughly 8.66% YTD. In an effort to allow the yuan to become a semi-free floating currency, the People's Bank of China signed agreements with Singapore and the UK to allow for direct trading between the three countries without the intermediary zone of Hong-Kong. As this begins to take effect, dealing in yuan will become much easier encouraging more businesses across the globe to start using CNY instead of USD to conduct their transactions.
YTD the yuan has appreciated almost 2.3% against the dollar and is currently trading up near the 6.07 range. As restrictions on the yuan continue to lessen we anticipate it will further appreciate against the dollar setting a mid-January price in the low 6.05 range.
The Japanese yen slid this week to its lowest level in five years as the difference in bond yields between Japan and the U.S. approach the widest level in over two years. If Japan continues to employ what has been dubbed "Abenomics," a combination of ultra-loose monetary policy and tight fiscal policy, we could see inflation levels rise and push the yen lower.
YTD the yen has depreciated more than 21.3% against the dollar and is currently trading near the mid-102 range. Beginning in January of 2014 we should see the yen retract to the mid 105s as the U.S. economy continues to show signs of improvement, spurring the possibility of reduced bond purchases.
The Australian dollar slid to a three month low this week as GDP growth for the third quarter came in weaker than previously forecasted, dampening the demand for the nation's assets. Unemployment for November also rose to 5.8%, the highest level since the financial crisis of 2007-08 prompting the Australian Central Bank governor Glen Stevens to leave all options on the table including quantitative easing.
Moving forward into 2014, Australia's ore continues to be in stout demand thus adding pressure for the Australian Central Bank to promote further deflation of the currency so ore exports can remain competitive. During the next few months we anticipate that the Aussie dollar will continue to trend downward setting a mid-January price in the 0.87 to o.88 range.
That wraps up our December mid-market analysis. We hope you can use this insight to your advantage as we look to a more prosperous 2014.
For a look at the market over the last few months, check out our Currency Watch archive.
If you have specific FX related questions, please submit them to NCarroll@gpsfx.com.
About The Contributor: Nathan Carroll was a professional surfer in Hawaii for over 10 years and has always been passionate about global economics and international markets. When he retired from surfing he joined the FX Sales &Trading team at GPS Capital Markets, Inc. (www.gpsfx.com), a Corporate Foreign Exchange Firm. Currently, he is working with a variety of global action-sports brands helping them improve their processes surrounding FX transactions. Through identifying and managing their foreign currency risk, these companies are better protected and adapted to the volatile market conditions.