Hungry Again?

Posted December 08, 2008

Obama's announcements concerning US economic stimulus programs spurred investors' risk appetites. The eastern European countries that hoped to convert to the euro have had to amend their time schedules.


Investors have recently been hungry for safe investments and that has been driving the currency markets of course.  The financial world has been waiting for some signs that global governments are going to be able to loosen credit markets and that financial markets are going to once again function normally.  One of the big problems the last few months has been lack of investor confidence in the financial policies being implemented in response to the crisis. 

There are signs that investors are once again getting hungry for asset investments that are not quite as safe.  US President-elect Barack Obama has announced a massive government program which will put up to 2 million unemployed people back to work.  The program is going to involve government projects to rebuild the US infrastructure systems and to make public buildings more energy efficient.  Obama has also committed to making the US economy his first priority. 

So what does this have to do with hungry investors you might ask?  Investors are now beginning to feel that the world's financial leader, the USA, is finally getting the crisis under control and the new leadership offers a sign of aggressive responsiveness.  The US Treasuries declined despite plans to flood the market with new issues in order to raise capital for the many commitments already made and to be made.  The result is an anticipated return of stability to the US dollar and the euro ($1.2715) as investors begin to look at investing in assets that have higher risk. 

The currency markets have been very volatile the last couple of months.  The dollar has been weakening and is impacting global economies around the world largely due to import order reductions.  For example, South Korea export orders from the US have declined due to the weakened dollar and the flailing economy.  But with the announcements of Obama has come market rallies around the world leading to strengthening currencies.  The South Korean won ($.00068) has begun to strengthen again in the belief foreign investors will be returning to the South Korean markets.

It is believed the euro and the dollar will stabilize as paired currencies.  On the other hand, the dollar will most likely see a decline against the yen ($.0107).  Though investors are beginning to get hungry for riskier assets again, they are not anywhere close to trading like they would in normal market conditions.  The US unemployment numbers released last week showed the US recession is just heating up and the bottom cannot be foreseen at this point.  As a result, it is anticipated investor risk aversion will remain higher than normal leading to a strengthening yen. 

So you have an interesting combination of continued risk aversion coupled with a clear desire to begin investing in higher yielding assets. 

Obama's pledge to rebuild the US economy impacted a number of other currencies too.  For example, the Canadian dollar ($.7868) strengthened against the US dollar as did the South African rand ($.0970).  In addition, the Australian ($.6462) and New Zealand dollars ($.5346) strengthened also as investors began to seek higher yielding assets on the belief the US economy is going to be well managed under the new administration. 

By the way, the US automakers are still waiting for Congress to decide on a loan plan.  The current news reports say the US Congress is planning on approving an initial $15 billion loan to General Motors, Chrysler and the Ford Motor Co.  The news has caused regional markets around the world to rally and is one of the factors leading to increasing investor appetite for higher yielding assets.

One currency consequence of the crisis is a crushing of eastern European hopes of joining the monetary union anytime soon.  Poland, Hungary and Czechoslovakia had hoped to adopt the euro, but the rules say a currency value cannot swing more than 15% in a 2 year period to be eligible.  The Polish zlotych ($.3279) has weakened against the euro by 21% since July 2008.  The Hungary forint ($.0047) has fallen by 16% against the euro and the Czech koruna ($.0492) has fallen 13%.  The hope had been to peg these 3 currencies to the euro in 2009 but it will be 2010 before eligibility is restored again and only if the economies experience a turnaround. 

So currency investors are once again whetting their appetites with some hors d'oeuvres that include higher yielding assets.  Perhaps if the recession does not go too deep and too long, the main course can be served once again.  The main course is normal trading patterns with normal investor responses devoid of panic buying and selling.