Briefing highlights
- Is Trump right on currencies?
- Canada creates 48,000 jobs in January
- Jobless rate edges down to 6.8%
- Trump tax pledge boosts stocks
- Trump to meet Abe
‘Accusations fly’
Amid everything he says and does that shocks us almost daily now, there’s a key question for policy makers and markets: Could Donald Trump be right about out-of-kilter currencies?
Partly, analysts suggest, though the reasons why aren’t that simple.
Which certainly raises the stakes as Mr. Trump meets with Japanese Prime Minister Shinzo Abe and in advance of a mid-March meeting of G20 finance ministers and central bankers in Baden-Baden.
“For some currencies he’s quite correct,” Adam Cole, Royal Bank of Canada’s head of G10 foreign exchange strategy in London.
“For others, I think it’s questionable.”
Mr. Trump has said the U.S. dollar is too strong, and has complained that Japan and China “play the devaluation market, and we sit there like a bunch of dummies. And one of his top trade advisers, Peter Navarro, has in turn criticized Germany for taking advantage of a “grossly” undervalued euro.
Mr. Cole looked at currency valuations via four measures this week, noting in a study that the political rhetoric “is more likely to have a lasting market impact if it is supported by the evidence on misalignment” and the questions surrounding the issue as “accusations fly” ahead of the G20 finance meeting.
Here’s what he found:
The U.S. dollar is, in fact, overvalued: “All valuation metrics agree on this, and the magnitudes are significant.”
So, too, are the Swiss franc and the Australian and New Zealand dollars: They’re overvalued “by a similar magnitude” to the U.S. currency.
On the other side of the ledger are the undervalued yen, British pound and euro, though the latter not “grossly” so.
The peso is also undervalued, though it’s in a category of its own given that it has been driven down by Mr. Trump’s repeated threats against Mexico.
Where China’s concerned, it’s hard to come to “firm conclusions” on the yuan: “It is, however, not at all obvious that [the yuan] is as undervalued as some in the U.S. administration seem to think.”
And an interesting tidbit heading into the renegotiation of the North American free-trade agreement: The Canadian dollar “is neither overvalued nor undervalued, which may surprise some after four years of steady depreciation.”
Where the euro is concerned, remember that Germany’s finance minister, Wolfgang Schaueble, agreed that the currency is too low for Berlin.
And many observers say Germany’s status as an export powerhouse is because of productivity gains rather than currency tinkering.
Compared to Mr. Cole, Dhaval Joshi, the senior vice-president of European investment strategy at BCA Research, took a far harsher view of the euro, blaming European Central Bank policies for the “over-competitive” currency.
“President Trump is right about one thing,” Mr. Joshi said.
“The ECB’s own analysis ... shows that the trade-weighted euro needs to appreciate by 10 per cent to cancel the euro area’s competitive advantage versus its major trading partners including the United States,” he added in a new report titled “The Great Currency Manipulation.”
“To cancel Germany’s competitive advantage, the ECB calculates that the euro needs to appreciate by 25 per cent.”
Everything was in balance before the ECB embarked on aggressive easing, Mr. Joshi said, though all of the world’s big central banks did the same thing and interest rates remain exceptionally low.
“Prior to the ECB’s extreme and unprecedented policy easing, the euro area’s competitiveness was exactly in line with its trading partners,” he said.
“The ECB says that it does not target the exchange rate, but it is fully aware that negative interest rates and trillions of euros of asset purchases carry major ramifications for the euro’s value.”
Jobless rate inches down
Statistics Canada will no doubt have shocked economists again with a jobs report showing the economy created 48,000 positions in January.
Shocked because most observers projected a decline. Again because there always seem to be questions about the monthly labour report.
Part-time employment rose strongly, but there were full-time jobs added, too, and the unemployment rate edged down to 6.8 per cent.
Full-time employment is now up by 86,000 from a year ago, and part-time work up by 190,000.
Here’s a statistic worth noting: Part-timers now account for almost 20 per cent of the total.
Trump boosts stocks
It’s not quite phenomenal yet, as Mr. Trump might phrase it, but markets are climbing in the wake of the president’s tax overhaul pledge.
“The move to new record highs in equity markets and surge in the U.S. dollar are symptomatic of a market craving a new stimulus,” said CMC Markets chief analyst Michael Hewson.
“The risk is that, as with most oases, they turn out to be an illusion, and given the new president’s propensity for melodrama, the risk is that this could well be no different,” he added.
“It is hard to imagine that he will be able to promise anything tangible within a two- to three-week window, however whatever the realities investors appear happy to take him at his word, as U.S. markets closed well above their previous peaks, while the U.S. dollar index looks set to post its first positive week this year.”
What to watch for today
Well, there is that meeting between Mr. Trump and Mr. Abe, though RBC’s Mr. Cole expects a friendly get-together.
“We expect this to be a relatively amicable affair, with the focus on potential Japanese investment in the U.S. and military co-operation,” he said.
“A U.S. official is quoted overnight saying that currency is not top of Trump’s agenda,” he added.
“While this may allow [the U.S. dollar versus the yen] to continue drifting higher in the short term, Japan’s alleged status as a currency manipulator will never be far below the surface and we would not see [yen] weakness as enduring.”