It has been a pretty uninspiring week in the forex market, the dollar in general locked in ranges against all currencies and that has kept the yen movements against the European currencies also limited.
Following what had been a strong call for the US economy to lead the rest of the world back to growth that led to a stronger dollar, the sentiment has remarkably failed to sustain those initial dizzy claims.
However, the numbers that are coming out from most areas of the world are showing positive signs, manufacturing seeing modest growth and with it an increase of confidence or perhaps more likely, hope that the worst is finally over.
Japan’s figures certainly echo this trait with better manufacturing output as May saw the third consecutive rise in May, car production rising a hefty 24.8 percent in May but still leaving the annualized figure down by 41.4 percent.
So does this represent a true recovery?
Well, it is an improvement. That cannot be denied but we have to remember it has taken, as Trichet remarked, “completely extraordinary stimulus packages.”
To highlight what “completely extraordinary” means we should note that the monetary base in the United States which has seen annual growth of between 0% and 10% over the past 50 years suddenly leap to almost 150% over the past two years…
It comes as no surprise that talk is more of inflation, the more spiky comments erring towards hyperinflation. That’s quite a stark comparison with Japan which is once again grappling with deflation.
What’s more the past week or two has seen China call for a new global reserve currency to replace the Dollar and to be administered by the IMF. After all China has a lot of investment tied up in US$ assets, not to forget Japan’s own massive investment in U.S. Treasuries.
And this seems to be the crux of the Dollar’s inability to make any headway right now but I don’t expect this to last much longer. In fact, as we go into the July 4th weekend there does seem to be a strong chance that the Dollar will finally break higher against the European currencies and I suspect the Yen also, but in a less remarked way.
This should then translate into Yen strength against the Europeans also as the world becomes more enthusiastic about the chances of a global recovery beginning to take hold.
However, if it’s any indication, I was in Hong Kong over the weekend and included in my talk the prospects for the Hong Kong and Shanghai stocks indexes. Both were very clearly bullish with much higher targets. What I did find interesting was that the Hong Kong index did not indicate making a new high but the Shanghai index did…
Thus the Dollar should begin to rise by next week at the latest and should accelerate into the end of the year. After that we’ll have to wait and see.
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