Currency Update for Steel Trading Nations

On December 27th Andrew Hecht wrote: “The most bullish factor for the dollar is that when it comes to yield, the dollar is not only the prettiest girl in the currency world, it is gorgeous. In early December, Mario Draghi told markets that Euro interest rates would remain at negative 40 basis points. Given the Fed Funds hike to over 60 points, the dollar now has a 1 percent advantage over the European currency. Additionally, Japan remains mired in economic malaise so the yield on the dollar makes the currency attractive for anyone holding the greenback. Moreover, the hawkish tone of the Fed in their December statement where they added another rate hike to the schedule for 2017 means that by this time next year, the spread between the dollar and the Euro and the Yen could be 1.75 percent or more. When compared with these two currencies, the dollar offers both a yield advantage and a bullish trend. It doesn’t get much better than that as the currency pays while you wait with a high degree of certainty for capital appreciation.”

Table 1 shows the value of the US $ measured in the currencies of 16 steel and iron ore trading nations on December 26th, it reports the changes in one year, three months, one month and seven days for each currency and is color coded to indicate strengthening of the dollar in red and weakening in green. We regard strengthening of the US Dollar as negative and weakening as positive because the effect on net imports.

An estimated 25 percent of the U.S. economy has some involvement in international trade therefore currency swings can have a large effect on the economy in general and of the steel industry in particular. At the three month level the dollar has strengthened against all sixteen currencies except Russia which is still on the rebound from the very severe decline in January of this year. At the one month level the dollar strengthened against 10 of the 16 and at the seven day level strengthened against seven. This trend seems to indicate that traders think the party is over for the moment and they will take a breather before the run up to next Fed meeting in April. Our last currency report was November 12th at which time the $ strengthened against 16 of 16 at the three month level, strengthened against 12 of 16 at the one month level and strengthened against 15 of 16 at the seven day level. Therefore at least as far as the steel trading currencies are concerned, the strengthening of the dollar has slowed.

In each of these reports we comment on a few of the 16 steel trading currencies listed in Table 1. Charts for each of the 16 currencies listed in Table 1 are available through December 12th for any subscriber who requests them. We also include writings from experts who we regard as credible to explain some of the currency moves that we are witnessing.

The Mexican Peso

Two days after the US election the peso broke through the 20/US $ level for the first time ever and bottomed out at 20.73 on December 2nd. Since then the peso has been trading in a range and required 20.58 units to purchase one US $ on December 26th. (Figure 2.) The Peso has declined by 16.2 percent in one year and by 3.96 percent in the last three months. On January 1st 1994, when the NAFTA was initiated it took only 3.5 pesos to buy one US dollar.

The Chinese Yuan (Renminbi)

On December 23rd Economy.com wrote: “A range of monetary policy announcements this week across Asia indicate that central banks are preparing for a shift away from their current accommodative stance and towards a more neutral position. In this, central banks are being swayed by stronger U.S. economic growth, higher U.S. interest rates, and higher commodity prices.” In China, fears that a rising dollar will destabilize trading in the Yuan has sent the currency to its lowest against the dollar in more than eight years and raised concerns that outflows could increase.

The Yuan has declined by 6.9 percent against the US $ in the last year and by 4.0 percent in the last three months (Figure 3). On December 6th the Yuan briefly broke through the 7 /dollar level then recovered to 6.945 on December 26th.

The Japanese Yen

On December 23rd Economy.com wrote: “The Bank of Japan will likely keep policy unchanged through 2017. The central bank is content with the yen’s recent 16 percent depreciation, which is set to boost export values and add to imported inflation over 2017. Moreover, the central bank is out of policy levers to stimulate demand: its pace of monthly bond purchases has been stretched to the limit, with the BoJ owning more than 40 percent of all Japanese government bonds—making it the largest debt holder.

The International Monetary Fund estimates that the BoJ will run out of JGBs to purchase by mid-2018 at its current monthly purchase of around ¥80 trillion annualized pace. So it’s likely that the central bank will look to taper its bond purchases towards the end of 2017. However, the timing and communication will be key, as BoJ will look to avoid talk of tighter policy, which may cause yields to spike.”

The Yen has declined by 13.9 percent in three months and by 3.5 percent in one month to close at 117.28/UD $ on December 26th (Figure 4).

The Turkish Lira

The Turkish Lira fell through 3.5/US $ on December 2nd and closed at 3.5066 on December 26th being down by 14.9 percent in three months and by 1.8 percent in the last month. Figure 5 shows the Lira to have been in free fall since mid-November.

The Euro

On December 5th Kenny Fisher wrote: “It was a rough weekend for the euro, as Italians decisively rejected a referendum on constitutional change. The referendum turned into a vote on the popularity of Italian Prime Minister Matteo Renzi, and the “No” vote cruised to victory with 59.1 percent, a humiliating defeat for Renzi. The prime minister promptly resigned after the referendum result. President Sergio Mattarella will now face the task of forming a new government, and if he is unsuccessful, elections will be called. This could open the door to the populist Five Star party gaining power. The party is anti-Eurozone and wants a referendum on whether Italy should stick with the euro. Thus, Renzi’s defeat has shaken up the Eurozone, which is still reeling from Britain’s recent decision to depart the club. The euro dropped sharply in Asian trade on December 5th, but has recovered and posted strong gains in the European session.”

The recovery that Kenny refers to lasted only 3 days and on December 20th the Euro broke through the 1.04 level before recovering to a value of 1.0460 US dollars on December 26th.

The Euro has declined by 6.9 percent in the last three months. Parity is on the horizon (Figure 6).

Explanation of Data Sources: The Broad Index is published by the Federal Reserve on both a daily and monthly basis. It is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. The data are noon buying rates in New York for cable transfers payable in the listed currencies. At SMU we use the historical exchange rates published in the Oanda Forex trading platform to track the currency value of the US $ against that of sixteen steel trading nations. Oanda operates within the guidelines of six major regulatory authorities around the world and provides access to over 70 currency pairs. Approximately $4 trillion US $ are traded every day on foreign exchange markets.