A Backwards World

Posted January 27, 2009

One day the yen is strengthening as a safe haven investment in volatile markets and the next it is being abandoned as investors interpret some government actions as good news. The yen fell against most major global currencies.


There was a day when investors were a lot more particular about what they considered good news.  It took more than mere sentiment reports and the need for massive government spending wasn’t necessarily a positive indicator.  Boy…can things change. The economic crisis has created a whole new way of looking at good news.

For example, the German sentiment index rose and that caused the euro to strengthen against the US dollar.  The US government says it is going to spend close to a trillion dollars it will have to borrow, and the world economies take it as a sign of hope that things may one day return to normal.  UK bank stocks rise despite the fact the government just announced it would have to inject more money into the economy and might have to purchase toxic assets.

In the Lewis Carroll book “Through the Looking-Glass and What Alice Found There” everything is backwards.  Today’s economy makes you feel as if you stepped through a mirror and found everything backwards and upside down. This is world where bad news can be good news and economic declines can cause currency and equity markets to rise.

How on earth is an investor supposed to cope with a mirror-world?  In the US, talk of partial nationalization of banks is gaining steam.  The US government would remove the toxic assets from bank balance sheets which frees up banks to begin lending again.  Once the toxic assets have been “cleansed” they would then be resold to private financial institutions.  No one is talking about what would happen if they can’t be cleansed. 

As a result of this discussion, investors are taking on more risk again.  This led to a weakening of the yen against most major currencies including the euro, the US dollar, and the Australian dollar. The yen weakened to 89.32 yen per US dollar; to 118.10 yen per euro; and to 59.58 yen per Australian dollar.

The US Federal Reserve met and it is clear there is not much left that can be done on their part to stimulate the economy.  The US benchmark interest rate is already at or near zero so further reductions are out of the question.   But the Reserve did indicate it would widen the types of assets that would be purchased in order to loosen credit.  The bottom line is that the US has done all it can do with monetary policy and what is left is fiscal stimulus policy changes.

In the Euro-Zone, the German sentiment index rose giving hope to the euro.  The euro rose against the US dollar to $1.3215.  Of course, the Canadian government announced a stimulus plan to boost the economy and investors saw the move as an indication of weakness. The Canadian dollar weakened to C$1.2251 against the US dollar. 

You just can’t win right now it seems.  In one country an economic stimulus plan is seen as a sign of fiscal strength and in another a similar proposal is interpreted as economic weakness.

Speaking of weakness, the Russian ruble has declined for 3 days in a row against the euro.  It weakened against the euro to 43.9772 rubles per euro.  The ruble also weakened against the dollar to 33.009 rubles per US dollar.  The Bank of Rossi is operating with new rules right now.  The currency band has been widened to 26 to 41 rubles versus the currency basket.

It is an upside down and backwards world right now when talking about the status of the financial markets.  It’s enough to make you feel just like Alice.