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| September
2006 |
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| There have
been few times in any of our lives when the global economy was on such
a knife edge; teetering on the brink of either a soft landing followed
by a rebound into growth or a slide into a period of tougher times. |
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| Analysts
are split almost evenly on the most likely scenario but they are unanimous
on the catalyst for change and all eyes are focussed intently and directly
on the US economy. The main problem is that, whilst Uncle Sam’s spending
capacity is the key to further economic growth, two years of interest rate
hikes are having an effect on the retail habits of American consumers. |
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| A quick round
robin of the statistics will paint the picture (I know stats are boring
but stay with me and you’ll see why they are important in this context).
US existing home sales are sliding; we started the year with an annual
sales level of 6.75 million properties but this had fallen to just 6.3
million by August. However, at the start of the year, the average US house
price was $211,000 and this had grown to $225,000 by august. |
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| New
home sales offer a similarly confusing picture. If you believe the pundits,
things are tight in this market and yet we started the year with annual
growth of 2.91% but this was up to 4.1% by August. |
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| So the housing
market doesn’t give any obvious signals of a huge slowdown in the US; perhaps
retail spending is a clearer indicator. Well no; certainly the rapid rise
of oil prices caused some rumblings and the doom-mongers were tolling the
death knell for gas guzzlers and their drivers but, after a slight correction
in crude oil prices, the August consumer confidence index was up 104.5;
one of the best levels seen in 2006. And with inflation pushing along at
a fair clip, there appears to be little wrong with the US public’s appetite
for consumer goods. |
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| What has changed
though is the manufacturing sector with durable goods orders sliding for
two consecutive months in July and August. That in turn has contributed
to a slide in economic growth (GDP) from 5.6% in the last quarter
of the 2005 to just 2.6% in Quarter two of 2006. That is a definite
concern for the US Federal Reserve which is starting to see their rapid
hike in interest rates (from 1.0% to 5.25% in just two years) depressing
the expectations of businesses and consumers alike. The decline on. |
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| That is a
brief explanation of the background to the US Dollar’s quandary and, so
dependent is the global economy on US consumers that, this confusion is
creating all manner of volatility in other exchange rates. |
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| Sterling
against the US Dollar is still remarkably strong. The complications
on the Western side of the Atlantic are enough to contend with without
the mixed signals being emitted by members of the Bank of England’s monetary
policy committee. On the day of writing this report we have seen entirely
opposing views from David Blanch flower and Sir John Gieves which leaves
traders with as many arguments for interest rate hikes in the UK and there
are for rate cuts. |
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| Mind you,
if the BOE isn’t opaque enough for you, there are equally conflicting signals
elsewhere with inflation above the BOE target but retail spending yo-yoing
month on month. Manufacturing is under pressure but the housing market
is ramping away; wage growth is running at a sustainable pace but consumer
credit is running at twice the rate of anywhere else in Europe. Add the
argument over who will be the next Prime Minister and the recipe for volatility
is almost complete. |
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| And if all
of that isn’t confusing enough with just the four components of the United
Kingdom, just image how irrational some of the decisions of the European
Central Bank must look to the twelve Euro member states and the twenty
odd nations whose currencies are closely aligned with the Euro. |
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| The ECB
is expected to raise the base interest rate in Europe at least one more
time before the end of 2006. That in itself ought to strengthen the
Euro but the Euro can’t make headway against the US Dollar and any attempt
by traders to push Euro-US Dollar rate above $1.29 is thwarted by the wave
of USD buying that ensues. Traders are happy with the level of interest
rates in Europe, fairly happy with the level of manufacturing output and
relatively satisfied with the gentle downward direction of unemployment
across the Eurozone. |
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| However, Europe
exports a large part of its output to the US and any slowdown in spending
by US consumers threatens BMW, VW and Mercedes as well as wine producers
and luxury goods manufacturers plus many other businesses which rely on
the US market for growth. |
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| So despite
all manner of anti-US rhetoric, almost every country around the globe should
be rooting for a revival in the US economy because; whilst I haven’t covered
them here, the Chinese, Japanese, Indian and Middle Eastern economies all
rely in some degree on the performance of the US consumer. Without
that bulk of spending power, Chinese exports would lag, demand for Japanese
electrical goods would decline and OPEC would find itself having to cut
production in order to maintain current oil prices. |
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| This, dear
reader is a very long winded way of explaining how interdependent exchange
rates are. |
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| If US consumers
are not spending, the sales of US Dollars will decline and the Dollar will
retain some strength. In fact the USD is strong at the moment because the
prospects for lower interest rates have spurred the US equities markets
on to record highs and that has attracted foreign investment. |
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| A stronger
Dollar has the effect of weakening other currencies; Sterling slides, the
Euro follows suit and the Yen, which is already weak, hits new levels of
weakness on an almost monthly basis. |
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| A strong Dollar
makes it easier for those leaving the US to move abroad but creates hassle
and extra cost for European buyers of Floridian holiday homes. A weak Pound
hampers the efforts of those in the UK who wish to move to the US, Australia,
Canada, New Zealand and Europe; whereas weakness in the Euro makes life
very attractive for all those UK based investors in European property. |
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| Where currency
markets are concerned, clouds do have silver linings but the person suffering
from the cloud isn’t necessarily the same one to whom the silver lining
applies. Mind you, in these volatile times, if you are under a cloud,
waiting a few days will often reveal the silver lining anyway. |
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| As is always
the case, where currency matters are concerned, timing is of the essence
and specialist currency dealer like Halo Financial holds the key. |
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