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Unintentional Comedy
In a speech last week, William Poole, president of the St Louis Fed, described the recent depreciation of the U.S. Dollar as "inexplicable". Really? Perhaps someone should tell Mr. Poole that the dollar is falling because the U.S. borrows about $3 billion a day from foreign nations to finance its out of control spending, and because the Federal Reserve – the organization that employs Mr. Poole – prints so much money that it is effectively devaluing the currency. The punch line is this: the Fed says it won't tell us how much money it is printing because they say it is too expensive to compile the data! Hey, if they need a few extra bucks, they could always print them. If you'd like to know more about the U.S. Dollar than Mr. Poole apparently does, please read this article, titled "The U.S. Dollar and the Thief in the Night."
Singapore Sling
By the time you read this, I'll be on my way to Asia. It seems that everywhere I go these days, my home currency, the U.S. Dollar (USD), is taking a drubbing and Singapore is no exception, with the Singapore Dollar (SGD) reaching a ten-year high last week vs. the hapless greenback. Looking at the monthly chart, the Singapore Dollar has rallied consistently for five years against the U.S. Dollar (see figure 1).
Figure 1: USD falling vs. SGD for the past five years. Source: Saxo Bank
The catalyst for the most recent move was last week's announcement by the Monetary Authority of Singapore (MAS). The monetary authority announced that they would extend their current three-year running policy to allow a stronger currency to fight inflation. This is a big deal, because the authority generally allows the Singapore Dollar to trade within a narrow band vs. a basket of currencies, and now they are allowing the currency to strengthen more than previously anticipated. The MAS is calling for inflation levels of between 1.5% and 2% this year and as much as 3% in 2008, and hopes that a stronger currency will help to keep prices under control.
Meanwhile, both Goldman Sachs and Morgan Stanley are calling for the further appreciation of a variety of Asian currencies. Their belief is that, just like the MAS, Asian central banks will allow their respective currencies to strengthen in a bid to fight inflation. Goldman likes the India Rupee, the Malaysian Ringgit, the Philippine Peso, the Thai Baht, the Singapore Dollar and the New Taiwan Dollar. Morgan Stanley raised its forecasts for the China Yuan, the Korean Won, the Malaysian Ringgit, the Thai Baht, the Singapore Dollar and New Taiwan Dollar. According to the Taipei Times, 14 of 17 currencies of Asia's largest economies appreciated against the US Dollar in the past year, with India's Rupee having the third-best performance at 16%.
Lip Service
On a brighter note, last week's U.S. Federal Open Market Committee (FOMC) minutes showed concern among policy makers over the potential for further U.S. dollar weakness to contribute to inflationary pressures. At least they are now acknowledging that there is a problem with the greenback, specifically an inflationary problem. Think about it this way; if dollars are worth less, it will take more of them to purchase goods from overseas. That means prices of imports will rise, and this in turn will allow domestic manufacturers to raise their prices, too.
Perhaps it is not a coincidence that President Bush, in an interview with the Wall Street Journal last Thursday, expressed support for a strong U.S. dollar. Bush said Treasury Secretary Henry Paulson "reflects the view of this administration that the strong dollar policy is the correct policy." Bush also said, "We also believe that the best way for a currency to become valued is through the market." While it's nice that Bush and other government officials are paying lip service to a strong dollar policy, its important to understand that they aren't actually doing anything to make the dollar stronger. Paulson's comments were particularly telling; while he also expressed support for a strong U.S. Dollar, he commented, "Currency values should be set in a competitive marketplace based upon underlying economic fundamentals." Well, unfortunately for the U.S. Dollar, they are, and poor fundamentals are yet another reason why the buck is in the dumps.
Look at it this way; if the market truly believed that the U.S. government was about to pursue a strong dollar policy in any way, shape, or form, the USD would be strengthening right now, in anticipation of a policy change. A quick check of the U.S. Dollar Index reveals the true beliefs of traders about the future of the greenback (see figure 2).
Figure 2: U.S. Dollar continues to fall vs. a basket of currencies. Source: Net Dania
A survey of last week's carnage shows the Canadian Dollar reaching yet another new three-decade high vs. the greenback, the Australian Dollar maintaining multi-decade highs above the 90-cent handle, and the Euro just 100 pips away from its recent multi-year high vs. the USD. To put it mildly, traders don't seem to be afraid of any impending USD strength.
So That's Where My Money Went!
China's foreign exchange reserves reached $1.43 trillion at the end of September, up 45% from the same period last year, according to the People's Bank of China. Over the first nine months of this year, $367.3 billion was added to the country's cache of foreign exchange reserves, the central bank said, and in September alone forex reserves rose by $25 billion. China's soaring trade surplus is the major reason for the boom in forex reserves.
The massive forex reserves are causing excess liquidity in China, leading to an unprecedented boom in stock prices. China's economy is growing at an 11% pace, but stocks on the Shanghai Stock Exchange are trading at eighty times earnings, compared to the meager sixteen times earnings multiple currently sported by the S&P 500. Stories abound of everyday people borrowing money from the banks and throwing it into the ever-rising stock market, which has gained 110% so far this year and more than 200% since January 2006.
Are we seeing a bubble in China's stock markets? Over 27 million brokerage accounts were opened in 2006, bringing the total to well over 100 million, and people are quitting their jobs to trade stocks. Sound familiar? Those of you who traded NASDAQ stocks in the late '90's know exactly what I mean. When lawyers and doctors are quitting their jobs en masse to trade, and when you can't get maid service because all of the domestic help has quit to trade stocks, it's usually a sign that a top is near. When JP Morgan took a cautious stance on Baidu.com (BIDU) last Thursday, the stock tanked by over 20 points, initiating a wicked reversal in NASDAQ tech stocks. Is this the beginning of the end of the China stock bubble? Only time will tell, but one thing is for certain – when this party finally does end, it won't be pretty.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through