Wednesday, October 21, 2009

euro exchange rate at $1.50 is a disaster for the European economy and industry

“The euro exchange rate at $1.50 is a disaster for the European economy and industry," said Henri Guaino, right-hand man of President Nicolas Sarkozy. The currency has risen 15pc in trade-weighted terms since March, equivalent to six quarter of a percentage-point rises in interest rates. It briefly flirted with $1.50 against the us dollar rate on Tuesday before falling back on intervention fears.

What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.

French finance minister Christine Lagarde said it was intolerable that Europe should "pay the
price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year.

Europe and Japan are now the last two blocs standing as everybody else lets their currencies
or takes active measures to hold down the exchange rate -- with "beggar-thy-neighbour" echoes of the 1930s.
Brazil has become the latest country to intervene, resorting to controls to cap the real after its 42pc rise against the us dollar exchange rate since March. It is imposing a 2pc tax on flows into bond and equity markets. Finance minister Guido Mantega said the move was to head off an asset bubble. Critics called it a "desperate move" that would distort markets.

Hans Redeker, currency chief at BNP Paribas, said the strong real is "eating away" at Brazil's
manufacturing base. "They are not willing to take any more of the adjustment burden as long as China and other surplus countries do nothing," he said.

Switzerland is openly intervening to hold down the franc in order to stave off deflation. Canada and New Zealand have talked down their currencies. Britain and Sweden have opted for stealth devaluations.

Korea, Thailand, Taiwan, the Philippines, Indonesia and Russia have all been buying dollars to
stem their currencies' rises. The effect is to perpetuate the imbalances that led to the credit bubble from 2004-2007 and ultimately caused the financial crisis. Reserve accumulation fuels asset booms because it creates a wash of liquidity and drives down global bond yields. Asia
clearly needs to sharply revalue against the West to right the system.

Professor Michel Aglietta from Paris University says the euro exchange rate is 40pc above its
purchasing parity of level $1.07 (a low estimate), citing it as the reason why Peugeot and Renault have shifted annual production of one million cars to Eastern Europe since 2004.

Airbus is moving plants offshore, building A320 jets in China. It is relying heavily on US
contractors for its A350 jet. Fabrice Bregier, Airbus chief financial officer, said the current exchange rate is "becoming very difficult for all industrial companies which have their costs and need to buy euros. We can only appeal to monetary authorities to see to it that there is stability in exchange rates."

The European Central Bank could take some of the steam out of the euro rate by signalling a less hawkish policy. It may be pressured into doing so. EU ministers have the final say on exchange rate under Maastricht, though they have never used this power – publicly.

What is missing is a unified front of EU governments. Italy has been remarkably quiescent,
given its export slide. Germany has a higher pain threshold for a strong currency after gaining competitiveness by squeezing wages. But there are limits even in Berlin. The IWK institute says the danger point for German exporters is $1.45.

Jean-Claude Trichet, ECB president, has stepped up his rhetoric against "disorderly" currency
moves, warning that authorities on "both sides of the Atlantic" were monitoring the markets. He made an unscheduled appearance on Monday to drive home the point. The body language is changing.

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Wednesday, October 14, 2009

Canadian Dollar exchange rate not reach parity with the US

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The important release today is retail sales at 8:30 am ET, which will set the tone for the day until corporate earnings start having their effect. The Market News forecast comes in at -2.1% with the range minus 1.3 to -2.6% - no positive number is even possible. Since August sales rose 2.7% (led by autos), the Sept results will mostly offset and probably cause doubts about such a joyous and heedless embrace of risk. Ex-autos, Sept retail sales may rise 0.2%, which is nothing to write home about.

We may get a pullback today, or we may not. We may get one Friday as foreign exchange traders stand back and look at what they have wrought (and take profits). Note that there is no particular sense of panic or crisis abroad in the land. The US dollar rates is falling for reasons we think we can identify and understand, especially the oil/gold story. As for perspective, why should the Canadian Dollar exchange rate not reach parity with the US? It may have a messy political landscape but it also has commodities galore and some very smart guys in the BoC with a tart tongue. The closest the Canadian dollar has come to parity is 1.1163 in 1991, by the way.

While we don’t have a problem with the Canadian , or even the Australian dollar exchange rates, we do have a problem with the Swiss franc nearing parity with the dollar. Nobody much pays attention to purchasing power parity these days, but the Swiss franc was already overvalued at 1.1500 (November 2007), so it must be wildly wrong at 1.0200. We may pay $1.50 for a Coke in Connecticut, but in Switzerland, it’s about $4.50. Eeek. Besides, the SNB is not amused at too-strong a Swiss franc, and while its main concern is with the swiss franc to euro exchage rate relationship, the best us dollar rate counts, too. The Swiss franc reached its highest ever against the dollar in March 2008 at 0.9639, the height of the financial sector crisis (and the stock market low). We would be flabbergasted to see the same crisis-level seen again--without a crisis. In fact, it’s been a while since we had something that could be named a crisis. We can’t forecast the unforecastable, but we can warn that crises are a regular feature of the landscape and we should not act as though a new one is not possible.

Pounds to US Dollars = 1.5948
Pounds to Euros = 1.0710
Euro to Pounds = 0.9339
Pounds to Australian Dollars = 1.7472

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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