November 17, 2015    8 minute read

#MissedThisWeek : Is it all about the dollar?

   November 17, 2015    8 minute read

#MissedThisWeek : Is it all about the dollar?


MissedThisWeek is a weekly review covering a huge variety of economic topics from the global economy to corporate actions. All predictions made within these articles are solely of the author’s own mind and are not to be used as financial advice. Please feel free to leave comments and make sure to return for the following week’s reviews!

All eyes on the dollar

You’d like to think it’s not but, regrettably, almost all of the economic events this week were in some way influenced by the currency of the world’s strongest economy. Last week Goldman strategists called a dollar-euro parity, highlighting their beliefs that at some point in 2016 we’ll see a 1 for 1 situation between the two currencies, and if this week is anything to judge by, their long shot may come off.

On Thursday, Mario Draghi speaking at the ECB told Europe and the world of how the economic downsides for the eurozone were ‘clearly visible’. He pointed to worsening trade due to foreign weakness and a lack of sustained growth in the economy as the main reasons for his revision of how quickly Europe might be seeing inflation anywhere near its targets. Barely a minute into his speech and the euro was driving for the floor, and not just against the dollar. Watching it myself I can only imagine every FX strategist in Goldman Sachs rising from their chair slowly, like an NFL fan watching a breakaway in slow motion after he’s just laid a bet on a touchdown in the last five minutes of play. There’s the 10, the 20, the 30 and he’ll go all the way! Well it didn’t quite go that far but it did burn through the 1.07 level on the back of Draghi’s comments, a level we haven’t seen the euro drop below since late April.



Valentin Marinov, previously head of FX at Citigroup, suggested the euro-dollar exchange will rest along the 1.06 mark whilst the divergence of the two central banks continues. The divergence he refers to is a tightening of policy by the Federal Reserve in the form of raising interest rates, and an easing of policy by the European Central Bank by either quantitative easing or a drop in deposit rates. Marinov comments how a strong dollar may stay both hands; a weaker euro might give the eurozone the stimulus Draghi believes it so badly requires, whilst creating too tough an environment across the pond for Janet Yellen to raise rates. James Bullard of the Federal Reserve Bank of St Louis wasn’t having that.

“We need to get going once we have the opportunity to get going”

Citing the numerous asset bubbles and mischief that has occurred due to federal inactivity in the past, Bullard suggested a December rate hike was not likely but necessary.

 China’s woes

China for once didn’t have its eyes firmly fixed on its exchange rate with the dollar but more with the prices of various non-precious metals and its own data, both of which have been spectacularly missing analyst estimates on and off since summer.  On Monday mainland exports dropped for the fourth report in a row, and imports fell for the 12th consecutive report. Tom Orlik from Bloomberg highlighted the choice for the PBOC, more interest rate cuts and stimulus, or further devaluation of the yuan. In the short term, the strong dollar is keeping the yuan pinned pretty low already, it’s not really an option unless China really wants to annoy world leaders right now. Stephen Cohen, Blackrock’s Chief Investment Strategist suggested wisely that the last thing China wants right now is a repeat of their cleanup after 2008 where they plonked a huge stimulus package in the middle of the table and declared the problem solved.

“They’re going for targeted stimulus rather than a blanket injection, they don’t want to leave all that bad debt behind [like 2008]”

With commodity prices so low it remains to be seen how quickly China’s turnaround will be. Unfortunately they seem to be locked in a vicious cycle, evident on Tuesday as low CPI numbers triggered a crash in the price of nickel and ultimately signalled even weaker demand for commodities in a country that has half an economy dependent on them.

Good old Britain

If any country was going to march on with their own agenda this week without giving a thought to the dollar it was always going to be the proud island of the UK that had it’s own political agenda to think about. The CBI conference on Monday saw the re-emergence of the Brexit debate as David Cameron took to the stage to enlist the support of UK business owners and executives in backing his four ultimatum demands to the ECB. The demands, though more prose than distinctive objective, did cover the hot topics of competition and mobility and were welcomed by the ECB save for the last, the UK’s control of its own immigration. Guy Grainger, the UK CEO of Jones Lang LaSalle, discussed how his business realied heavily on a mobile workforce across Europe and that most of the large corporations in the UK backed staying in a reformed EU, or at least a seat at the table.

With a patriotic tone Cameron highlighted the inspirational achievements of the UK as a business hub, home to 4 of the 10 most recent ‘unicorns’ in Europe, the new home for 191 headquarters since 2014 and the founder of Tech city, once a 250 company business park, now a 3000 strong monument to innovation. There was a tear in many an eye, but as Kit Juckes, an FX Strategist from Societe Generale points out, the polls won’t mean a thing until a referendum date is in the book.

What to watch…

Emerging markets. You think Draghi is worried about a strong dollar? Try having current account deficits with the US that  are over 30% of GDP, that’s when you’re in trouble. Couple that with an emerging market whose economy is based predominantly around construction or commodity production or exporting and its a nightmare not worth comprehending. Soon, if not already, the little guys are going to wake up and realise not only are their exports worth a third of what they used to be but also that the interest bill with an eagle on the letterhead seems to be saying the same number in USD and a much bigger number in their own currency. YTD against the dollar, the South African Rand is down 19% and the Lira and Rial are both down 20%.

Oil, oil, oil. I said it last week, all the commentators said it this week and now i’ll say it again, this game is all about supply. None of the OPEC countries are giving in and US inventories that looked to be going down in the second quarter of the year and the start of the third took an upturn recently, proving, as usual, that the United States won’t be bullied in a head-to-head show of resources. So what’s going to change? A lot of the talk this week was about the December 4th meeting of the OPEC committee, where Iran could potentially enter the foray with its own supplies, but if i’m honest how much more supply effect can there be on the downside of the price? One major shortage, that’s what you’re looking for and it’s going to be forced. These are the richest countries and conglomerates in the world, they’re not giving in to one another over $40 a barrel. As I’m writing this the scenes of the attacks in Paris are continuing on the news (my heart goes out to all those involved in Paris on Friday) and I can’t help to wonder if intervention into Syria and against ISIS might result in the oil price endgame.

Alibaba. China might be stalling but Alibaba is going from strength to strength and it showed that more than ever on Thursday, 11th of 11th, or as it’s now known in China, Singles’ Day! A chance to buy something for yourself or for someone else, or just to hit back at the couples for Valentine’s Day. Whatever the reason, Alibaba sold $14bn worth of merchandise in 24 hours, $1bn of that in the first three minutes. Singles day this year eclipsed Black Friday, Cyber Monday and all other shopping holidays put together and Alibaba created Singles Day! The stock price is low all things considered, lead by innovator Jack Ma who’s got his head on the right way round, it seems investors dislike China more than they dislike the company, not a good way to evaluate a business that is looking to go international if you ask me.

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