Good perspective here from SocGen’s currency analyst Sebastien Galy. Between the Italian election uncertainty and the UK downgrade, it’s safe to expect another dollar pop:
The combination of a UK downgrade and a uncertain Italian elections are the fuel for a run of stop losses on long GBPUSD and EURUSD at the opening of the markets in Asia. CFTC positioning had already shown another large scale profit taking on USD shorts and we are likely in the process of neutralizing these positions in favour of JPY shorts (see report for those that asked to be on the cftc mailing list). It is the stuff of a strange golden age of fx, under invested, over achieving for no great reason, a telltale of a greater instability in the global economy.
A confluence of uncertainty helps the greenback.
The two most-hated currencies in the world.
SAN FRANCISCO (MarketWatch) — The British pound will face continued pressure in the coming weeks as confidence erodes in the United Kingdom’s recovery efforts following the loss of the country’s triple-A rating, according to analysts.
The British pound GBPUSD -0.5980% fell sharply to below $1.517 from around $1.525 late Friday following Moody’s U.K. ratings downgrade to Aa1 from Aaa. The pound had surged briefly past the $1.53 mark before the announcement on Friday from $1.515 on Thursday after touching an intraday high of $1.55 on Tuesday.
In our prediction two weeks ago of who the next Bank of Japan governor was likely to be, we said that “the tussle lies between a slightly less dovish bureaucrat in Toshiro Muto (favored by the opposition) and a banker, Haruhiko Kuroda, who is a front-runner in Abe’s camp…. we suspect Abe will err on the side of uber-dovish to fight the currency wars alongside him.” Sure enough, the uber-dove Kuroda, not to be confused with the Yankees pitcher, is now set to become BOJ governor.
From Reuters, “Japan’s government is likely to nominate Asian Development Bank President Haruhiko Kuroda, who has called for pumping more money into the economy, as its next central bank governor, the Nikkei newspaper reported on Monday. Kuroda, formerly Japan’s top currency diplomat, has already been offered the post unofficially by the government, which plans to submit its nominees for three BOJ leadership posts to parliament this week, the paper said. Kikuo Iwata, an academic known as one of the most vocal advocates of aggressive monetary expansion, is likely to be nominated as deputy BOJ governor, the Nikkei said without citing sources.”
Listen in to the earnings calls from multinationals this quarter and you’ll hear a common refrain: Fear the stronger dollar.
FORTUNE – If there was a chorus to be sung this earnings season, CEOs would probably reference the mighty greenback in harmony. It’s one of the biggest threats to profits.
A stronger dollar isn’t always bad news for corporate America. But as the growth of earnings decelerates in the second quarter, CEOs from McDonald’s (MCD) to Colgate-Palmolive (CL) say that an appreciating dollar has been bad for business lately. Not only does it make products more expensive, but it also means sales made overseas aren’t worth as much when converted into a stronger greenback.
To be sure, most companies generally prepare for fluctuating exchange rates. They could raise prices, for instance. But the pace at which the dollar has strengthened in the three months ending in June has surprised most executives. During the second quarter, the dollar gained 5% against the euro. As Europe’s ongoing debt crisis took a turn for the worse, investors looking for a safer place to park their cash turned to the U.S. dollar. As of Wednesday morning, it stands at $1.2311 per euro in New York.
As the U.S. economy recovers, a strengthening dollar might cause the next financial crisis, warns Singapore-based economist Andy Xie.
“The first dollar bull market in the 1980s triggered the Latin American debt crisis, the second the Asian Financial Crisis. Neither was a coincidence,” Xie writes for Caixin Online, a website specializing in China’s financial and business news.
When the dollar is in a bear market, liquidity flows into emerging markets, causing their currencies and asset prices to appreciate, which supports domestic demand.
“When the dollar changes direction, so does liquidity,” according to Xie, a former Morgan Stanley economist who predicted the economic bubbles like the 1997 Asian financial crisis and dot-com bubble.
“The virtuous cycle on the way up becomes a vicious one on the way down. The emerging economies already suffer inflation. The liquidity outflow leads to currency depreciation, which worsens inflation.”