Currencies' Relative Performance Since The USD Low

Yesterday I was talking with a friend who was telling me that it was his dad's 63rd birthday on Sunday.  Craig went golfing with his dad that day on a beautiful long Labour Day weekend.  [I'd better also spell it 'Labor Day' for our American friends or they won't have a clue what I'm talking about.  Just a courtesy to our pals south of the border who are still the only country in the English speaking world who can't handle 'u's where they 'think' they don't belong, lol.]

Anyway, Craig informed me that he'd also bought his dad a birthday present, a nice big juicy beef roast.  The price? $64.00.  Apparently my friend also had plans on dining at his dad's house after putting in 18 holes and shooting a score of 82.  But all this reminded me of one vision I remember from my youth, back in the days when I was an 11 year baseball star.  At least I thought I was a star.  My team mates thought I was the designated base stealer.  In any case the image came back to me as vividly as if it had been only yesterday.  I don't know why I have such a sharp memory for what seems like every day of my childhood, but whether that be a good thing or a bad thing... I do.  I remember incidents and conversations between adults when I was 2 years old and even younger.  I remember their names and faces... even as my mother was holding me in her arms while shopping for some sort of cloth.  Mrs. Reach was commenting on my eyes.  I remember riding my little bicycle as fast as I could on the sidewalk one day, turning the corner sharply only to slam into Mr. Eckmeyer's big belly as he came walking around that same corner.  Needless to say it wasn't Mr. Eckmeyer who got bounced 30 feet.  I've always been thankful that his big belly was soft or I'd still be picking my teeth out of the back of my skull to this day.  What a face plant that was!  Probably a record breaker but I digress...

My younger brother and I had piled into our dad's old '52 Chevy on a bright and sunny Saturday morning with our parents and we headed off to the local shopping center to hit up the old food mart.  No we didn't rob it, my folks had a few dollars.  Yes we were poor and the green Chevy was an old car even for back then.  But we had enough money for groceries.

About an hour and a half after leaving the house, my brother and I found ourselves sitting in the back seat of the car once again with grocery bags piled up so high between us that we couldn't even see each other, grocery bags between our feet and grocery bags in our laps.  The trunk was so full of groceries that when my dad finally coaxed it shut the watermelon exploded.  Our mom was sitting in the passenger's seat with grocery bags piled up between her and our dad, groceries on the floor between her feet and groceries in her lap.  My dad had a bag of groceries on his lap and a 10 lb. bag of potatoes hanging from his face, the bag clenched firmly between his teeth.  Yup, we'd gone grocery shopping alright.

Once we got home and started to help unpack all the goodies, I remember my mom saying to my dad, "Good Lord Eddie, can you believe the price of groceries these days?  Imagine that, $50 for just a car full."  And people wonder why, when every time I walk past the meat counter at the local supermarket, I tend to puke on the floor.  I realize that might be a disgusting habit but it's not because I don't love meat, it's because I have an incredible memory for visions from my youth.  And $50 for a boat load of food is one of my more cherished ones.  $64 for a single beef roast isn't.

So is it any wonder then that so many of us have this little quirk of wanting to know what our currency is doing relative not only to food items, but relative to all the other major currencies in the world?  Here in Canada we want our currency to be relatively stable and to remain relatively close to parity (or a bit lower if possible) with the American dollar.  So far so good.  It's an amazingly well managed pair and considering that those two currencies represent the largest single trading block between any two countries on the planet, it's critical that it remain well managed to the best extent possible.  Because god only knows, the last thing the Americans need is for their currency to suddenly tank and the Loonie to suddenly surge.  Imagine if we woke up one morning and realized that the Canadian dollar had quietly but steadily climbed until it became worth twice what the US dollar is.  The cost of Canadian crude to the USA would have doubled just that fast.  And the cost of all other Canadian exports would be so expensive we'd have a hard time selling them at all.  Nope... none of us want that... we want stability and relative parity if possible.

Other currencies and other pairings have relationships with each other that are just as important.  The Australian dollar and the Yuan have their own unique relationship.  The Australian dollar is also unique for another reason... its use in the currency carry trade casino.  It's for that reason that the Aussie:Yen pair is so very important as a measure of the appetite for risk.  Because when bankers can borrow Yen at next to zero interest and re-invest those Yen into relatively high paying Aussie dollars and bonds, they can just sit back and listen to the old cash register ring up profits day in and day out by investing money that they never even had in the first place.  They're using money they don't even have, and lots of it, to churn profits almost out of thin air.  It's a great gig when it's going their way.

But what happens when something goes wrong?  What happens when something that they weren't counting on suddenly almost scares the crap out of them, or at the very least causes their O-ring to tighten up just a little bit?  What happens when they get the sudden and undeniable urge to take a dump dump some of their holdings in order to reduce their exposure to risk?  The first thing they do, every damned time, is to unwind that risky currency trade they've got going with the Australian dollar.  They have to sell those Aussie dollars in a hurry, and at just about any cost, in order to pay back those Yen they borrowed... and in doing so, reduce their overall exposure to a very risky currency play.  It's a practice that will happen every time the biggest players get a scare.  And when they get a scare all of us had better pay attention.

About this time last year, the American dollar suddenly and inexplicably seemed to put in what appears to have been a meaningful bottom.  It remains to be seen whether or not the uptrend in the USD is going to continue but one would have to think that with 3 or 4 rounds of quantitative easing already in the books and another one being threatened, the dollar should have fallen right off the table by now.  Why hasn't it?  Because the evidence that deflationary forces are at work are becoming quite apparent if we look in the right places.  I've written several studies that provide overwhelming evidence that deflationary forces are indeed at work and have been since year 2000.  But that's not the topic of this conversation and I won't take that aspect any further today.

So since the American dollar put in what appears to be a meaningful bottom last summer, where does it stand relative to all the other key currencies in the world?  What have they been doing and where do they stand relative to each other?  In this simple chart we go back to the time of the low in the USD,  the beginning of May, 2011 and start from there.  On that day, every currency on the chart below begins with zero % fluctuation.  It's the starting point and from that day forward we map out the direction each currency has taken and the percentage move each has traversed since the first day on the chart.

Major Global Currencies Performance Style Since the USD Low of Last Summer.  Click here for a live and updating version.

It's pretty easy to see that late last month an inflection point seems to have been reached in several of the currencies.  The USD started to pull back.  Was that the top in the dollar?  Not likely... not likely by a long shot.  At least according to the evidence provided by several studies.that show deflationary forces bubbling and boiling just below the surface.  The $CRX story is the most amazing one I've come across to date.  So as could be expected, the other major currencies that do a lot of dealing with the American economy have gone the opposite direction that the USD has.  The Pound turned higher, the Swissie and the Euro did the same.  The Yen has remained relatively flat but the Australian dollar... what's up with the Australian dollar?  It's the only global player that is dropping along with the American dollar.  And why is that?  There can only be two reasons, a softening in the Chinese economy and/or currency carry unwind caused by credit contraction.  It's both.

Without presenting any analysis on the Aussie:Yen currency pair and without really presenting any analysis here at all, I just wanted to provide this 'overall' picture of what the major global currencies have been up to since the day the US dollar put in what could conceivably have been a multi-year low.  I'm not making that claim at this time because I don't know for sure and I haven't done any serious currency studies for quite some time.  Suffice it to say, one glance at the currencies in the chart above and two stand out like a sore thumb.  The US dollar and the Australian dollar.  Personally I expect every currency on the chart above to reverse direction except one... the Aussie.  I expect the US dollar and the Yen to remain above the zero line, the others to remain below it and the dollar to outperform the Yen slightly in the months and perhaps years ahead.

Thanks for reading this far, and just a polite heads up.. if you don't particularly care for shopping stories please don't bother reading any further.  You can save yourself a bit of time that way.

All the best and until next time... keep smilin'.

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Who said animals don't have a sense of humor?  This guy obviously does.  For me the funniest part is in the first 1/50th of a second of the video when "the plan" is hatched in the kangaroo's head.  He's thinking: "Ok, I'm gonna get this little pecker.  Watch this guys!"

Chart and chART courtesy of Papa Boule