Of the world’s two largest international financial centers, London is warming up to the renminbi, but Wall Street is running behind. Recently, the former mayor of New York City Mike Bloomberg congratulated President Barack Obama and President Xi Jinping for a number of economic steps, but in particular “advancing a mechanism to trade the Chinese currency in the United States.”
The US dollar fell against most of the major and emerging market currencies for the second consecutive week. The combination of market positioning, weak confidence that the Fed will hike rates this year, and the rise in some industrial commodities, seemed to be the main drivers. Technical considerations warn of scope for additional dollar losses in the coming sessions.
The US dollar has exhibited one of the most impressive trends that the currency market has seen over the last year, as the greenback has risen close to parity relative to the euro on several occasions. Since the dollar maintains its position as the world’s reserve currency, this creates ripple effects in a number of different markets. For investors, this is important because it means not all markets are likely to perform at the same rate into the final months of the year.
This is the sixth consecutive session the Canadian dollar is appreciating. The US dollar reached an 11-year high on September 29 near CAD1.3460. Today it traded to almost CAD1.2970. There have been four main drivers of the Canadian dollar advance.
First, the Canadian economy contraction that persisted through the first part of the year ended with renewed growth in June and July. Investors understood this as an indication that the Bank of Canada’s two rate cuts this year likely completes the mini-easing cycle.
The US dollar begins the fourth quarter on a mixed note. The dollar-bloc currencies are trading higher, helped by stabilizing commodity prices and the slightly better than expected Chinese manufacturing PMI (49.8 vs 49.6 expected after 49.7 in August). Australia’s manufacturing PMI also ticked up to 52.1 from 51.7. Sentiment toward the dollar-bloc has improved. Technically, it looks like the Antipodeans and the Canadian dollar put in near-term bottoms.
Junk bond yields have risen above 8% as investors’ fear a growing number of defaults are looming amidst weak sales and low commodity prices.
According to the Bloomberg World Bond Index, which measures high yield debt issued worldwide, the average yield of high-yield debt has risen to over 8%, while the yields on U.S. corporate bonds is nearing 8%. The yields on commodity-based company debt, particularly energy companies, is soaring the highest while bond prices fall.
When you begin to delve into the question of what money really is, you must prepare for some metaphysics. Money, currencies, and other such media of exchange differ markedly in their backgrounds and means of operation, and have changed quite recently into forms that are barely understandable.
The US dollar rose against all the major and emerging market currencies over the past week, save the Russian ruble, which gained about 1.5%. Comments from several Fed officials, and most notably Yellen, drove home the message, which arguably was diluted after the FOMC meeting: A rate hike this year is still the most likely scenario. This helped bolster the greenback.
There are conflicts among the many objectives shaping China’s exchange rate policy. Politically, China’s leaders are keen on having the renminbi become a major international currency. For this purpose, the renminbi needs to be strong and stable enough that others will use it to settle trade balances and as a reserve currency. The People’s Bank of China’s (PBoC) near-term objective is to get the renminbi into the International Monetary Fund’s basket of elite currencies — the Special Drawing Rights.
The US dollar sold off in response to the Fed’s lack of action, but it rebounded to close firmly before the weekend. For the week as a whole, it was mixed. The Australian and New Zealand dollars were the strongest of the majors, advancing 1.3%-1.4% against the greenback. They extended those gains on Friday, even though the dollar was firmer against most of the other majors.
