Forex: Is a Little a Lot?

Today brings a bunch of different economic data points from around the globe that singularly don’t add up to much but taken collectively do indeed show one thing: that economic recovery is taking place.All of the numbers and the metrics appear to be growing; yet why does it feel like things are actually getting worse? Time heals all wounds, as they say, but I suppose that is only true if you tend to the wound as well. While I give Bernanke and the Fed a lot of heat regarding their policies, I can’t deny that they are working. But at what expense?

Bernanke will be speaking today and tomorrow, where he is expected to talk about deficit reduction as well as defend his policies. US ISM manufacturing figures will be out later this morning.

In the Euro zone, PMI and employment figures came in better than expected and CPI estimates came in as expected.

The Bank of Canada is due out later this morning with their rate policy decision and with recent Loonie strength, I can’t see a rate hike or hawkish statements forthcoming.

Overnight, the RBA left rates unchanged in Australia and gave tempered comments about further hikes as well.

So the market is in a bit of risk-taking mode, with both stocks and commodities trading higher.

In the forex market:

Aussie (AUD): The Aussie is mixed this morning as the market was disappointed with the lack of hawkish comments from the RBA who decided to hold steady on interest rates to no one’s surprise. Retail sales figures came in better than expected. GDP figures are due out tomorrow which could resume bullish sentiment. (Click chart to enlarge)

Kiwi (NZD): The Kiwi is mostly lower as the impact of the earthquake is fully realized in New Zealand. A potential slowdown in China could hamper exports going forward, though rebuilding will provide jobs to the economy.

Loonie (CAD): The Loonie is higher ahead of today’s Bank of Canada rate decision. While rates are expected to remain unchanged, I do not expect any type of hawkish comments as the Loonie is nearing all-time highs vs. USD. Yesterday’s GDP report came in much better than expected, posting a gain of 3.3% vs. an expectation of 2.9%.

Euro (EUR): The Euro is higher across the board as PMI figures showed that manufacturing was up around the region and German unemployment sank three times as fast as the expectation. In addition, CPI estimates came in as expected, though this may invoke some hawkishness from the ECB later this week. (Click chart to enlarge)

Pound (GBP): The Pound is also higher as home prices showed a gain of .3% vs. an expectation of a decline of .2%, which adds to the inflation story. UK PMI figures were also better than expected.

Dollar (USD): The Dollar is mostly weaker but gaining strength ahead of Bernanke’s testimony. The Dollar is nearing all-time lows against many of the commodity currencies and it will be interesting to see if Bernanke tries to “manage” the Dollar a bit stronger or face criticism for allowing the Dollar to falter.

Yen (JPY): The Yen is lower across the board as the flight to safety play is starting to unwind as geo-political events take a backseat to the economic growth story.

No one can deny that the global economy is in much better shape than it was 2 years ago; now the debate is over whether the short-term fixes will have long-term consequences.

I still think that the US economy faces many challenges and despite decent economic data, the problem is only getting worse. To me, Fed policy is overkill. This is encouraging bubbles around the globe and at home, whether it is currency or commodity-driven; and these bubbles will need to be popped sooner or later.

So I don’t take too much solace in the economy and while I acknowledge that things could be worse, I think they could be so much better. Adding to deficits at this point is irresponsible, as is keeping money so cheap that this behavior is to be encouraged.

Until we see some political courage, I expect that the Dollar will continue to weaken.