Tags: US | economy | CLI | dollar

US Dollar Will Remain in Sweet Spot for Months to Come

Tuesday, 11 Jun 2013 11:09 AM

By Hans Parisis

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The Organization for Economic Co-operation and Development (OECD) just released its composite leading indicators (CLIs), which are designed to anticipate turning points in economic activity relative to trend, for its 34 member states.

Only the CLIs for the United States and Japan point to firming economic growth. The CLIs for all other major economies point to limited increasing growth momentum, with only Germany, the United Kingdom, Canada, China and Brazil moving close to trend. In the eurozone, the CLI for France remains at the weakest spot of all while not indicating any change in momentum.

When we take into account China's latest "real" export numbers — which only rose 1 percent year-on-year in May, far below the consensus of 7.3 percent — and imports — which actually fell 0.3 percent year-on-year, also far below consensus forecast of a rise of 6 percent — it's certainly not an overstatement to say prospects for global growth looks "patchy" at best due to the ongoing "stalled" eurozone economy, continuous shrinking of "real" Chinese growth data and increasing gross domestic product (GDP) growth uncertainties in various major emerging economies.

Remember that the United States is not an export-dependent economy. According to the most recent World Bank data available (2011), exports of goods and services as a percentage of GDP represented 14 percent for the United States (about 70 percent is consumption!), 31 percent for China, 32 percent for the United Kingdom, 50 percent for Germany, 15 percent for Japan, and so on.

These numbers show us why the United States is still in a better, but nevertheless far from ideal, growth spot than are many other big global players.

Maybe not headline news, but in my opinion certainly important enough to keep a close eye on as a long-term investor is the fact that "politics" seem having come back with a vengeance in the emerging economies complex, especially in Turkey and South Africa. This situation has already caused wild swings of 10 percent and more in the emerging foreign exchange markets that are already on the brink of currency wars, with Japan acting as the critical linchpin if its "forced" devaluation plans should to continue.

Long-term investors should normally not expect any Japanese ground breaking news before the Upper House elections on July 21, which the ruling Liberal Democratic Party and its coalition partner New Komeito party hoping to win.

In case they do so, "Abenomics," which refers to the economic policies advocated by Prime Minister Shinzo Abe, would finally come to full deployment whereby the Japanese authorities will try to further lower the exchange rate of the Japanese yen and, by doing so, hope to lift further the Japanese economy out of its chronic deflation.

That said, former Japanese Minister of Finance Eisuke Sakakibara, known as "Mr. Yen," has criticized Abe of not having done enough so far and said at the same occasion the Bank of Japan's 2 percent inflation goal is no more than a "dream." He also expects the yen not to weaken further and will continue hovering around 100 yen per dollar. It could become interesting to see if he only wanted to put pressure on Abe or if he really meant what he said.

Finally, in Germany, the Constitutional Court starts hearings on complaints by the German Central Bank and the Bundesbank, among others, about the European Central Bank (ECB) bond-purchasing program known as Outright Monetary Transactions (OMT). The program was put in place to buy "indirectly" through traders bonds of fragile eurozone debt-plagued member countries like the peripheral countries, and with now also France on its way becoming part of them.

The Bundesbank complains the ECB went beyond its "Maastricht" mandate whereby it was not allowed to "fund" member states directly. For the Bundesbank, the ECB's OMT program opened a backdoor to quantitative easing (QE) that always, in its opinion, implies the risk of stimulating inflation.

In my opinion, long-term investors shouldn't expect an immediate impact on the euro, as the German Constitutional Court final ruling is not to be expected before the German federal elections that will take place on Sept. 22.

Once that's over and when the Constitutional Court finally rules, whatever direct or indirect form of restriction/control of the German Bundesbank's participation in the ECB's OMT program, we could see so-called "unexpected" negative consequences for the euro and the eurozone as a whole.

As for as my preferences for asset allocation, I still continue to see the U.S. dollar in a sweet spot for months to come, which doesn't mean it will move upward in a straight line.

The U.S. economy and employment are, for good reasons, expected to continue on their slow grow path, and we should see interest rates to continue rising, which should be supportive for the dollar.

Besides that, the Federal Reserve is so far the only central bank in the world that has started openly considering "tapering" in the foreseeable future its QE policies.

Also because of a complex variety of "technical" reasons, I still expect a correction in equity markets. Commodities could also move lower, partly because of the recent soft growth data coming out of China.

As a long-term investor, I'd remain patient. Credit expansion (QE), as it has been and still is fostered by the major central banks in the world, is the greatest ever. The bust, whatever time it takes to occur, will be commensurate. Of course, that's how I see it.

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