To Hope or Not to Hope....That is the Question

Posted January 07, 2009

Once again the currency markets are very quiet, but there is an undercurrent of expectation that the quiet is about to change with the turmoil over Russian oil, the Middle East conflict and expectations of a deepening global recession. The US dollar weakened against most major currencies.


Every time the markets indicate they may be gaining recovery speed, investors dare to hope it is time to make some money again.  In 2008, losers far outweighed winners no matter what financial vehicle you talk about.  Yesterday, 6/January/2008, the Dow Jones Industrial Average managed to remain over 9,000.  It rose 62.21 points to reach 9,015.10. 

This morning the Wall Street Journal has headlines in the 'Money & Investing' section that reads, "Suddenly, a Markets Turnaround".  The reason for the headline is the fact that bonds, currencies, commodities, stocks and mortgage markets appear to be making a comeback.  But the real question is whether this is the start of a bear market or if it is an anomaly…or a "breather" as one writer called it. 

There are many events going on right now that actually would make you believe investors are not acting rationally by taking on higher yielding assets this early in 2009.  Russia has shut down the oil pipeline to the Ukraine in a flex of muscle, and this means oil supplies to many countries in Europe were cut off in the middle of winter.   This is during a time the Russian ruble is struggling to maintain its price and currency reserves as worldwide demand for oil is dropping due to people driving less and turning down their thermostats to save money.  In addition, the Middle East conflict continues to drive the price of a barrel of crude oil up. 

To top off this world of conflict, the US job market continues to deteriorate.  A private report that tracks lost jobs reported that 693,000 jobs were eliminated in December setting a new record since reporting started in 2001. 

By now you are probably wondering what all of this has to do with currencies.  The answer is: a lot…but not exactly how you would have expected. 

For example, the Russian ruble changed insignificantly despite the Ukraine pipeline conflict.  For all intents and purposes you can say it remained stable at $.03429 when paired with the US dollar.   The Canadian dollar strengthened to $.8464 though which would be expected with the increase in oil prices.  In fact, yesterday the Canadian dollar reached a price it has not seen since 10/November/2008. 

But will it last?  The indications today is that it will not because of the US jobless rate and declining oil exports. 

The US dollar weakened against the euro ($1.3699), Japanese yen ($.01064), and the UK pound ($1.4955) largely based on the jobless rate report and a disturbing Federal Reserve report. The US Federal Reserve held a meeting in December and review of the minutes reveals the members reduced their forecasts for 2009 economic activity.  Worse is the fact the huge bailout programs already in place are seen as ominous for government balance sheets.  As has been discussed in depth recently…who is going to fund the US debt?  And what happens if the government purchased assets go bad?  The Federal Reserve is saying the economy is in a lot of trouble and the result is long dollar positions are being reversed.  A long position is one where an investor is betting there will be an appreciation in a currency price. 

US investors are expected to begin repatriating their overseas investments as the global recession deepens. 

Yesterday, the US dollar weakened against the Australian dollar ($.7252) and the New Zealand dollar also ($.5986). 

With the currency market trading so slow, you just can't help but feel there is something looming on the horizon that is going to shake up the market again.  It is amazing the equity markets are remaining stable given the number of business insolvencies reported every day and continuing declines in estimated quarterly earnings.  Once again analysts are a bit wary and confused about what is going on. 

This economic crisis has made one thing very clear.  Many of the traditional trading rules have changed. The problem is no one knows yet how the new set of rules will read. 

So can you hope the markets are beginning a turnaround?  It's a question begging for an answer.