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Currency Impact Report, Nov. 28 - Dec. 2
December 05, 2011
Macro Notes Brazil’s currency gained on news that the government is lowering trading taxes originally instituted to slow the real’s appreciation. The finance minister announced the elimination of both a 2 percent tax on foreign investment in stocks and a 6 percent tax on nonresident investment in long-term corporate bonds, though a tax on some foreign bond and derivatives transactions remains in place. Elsewhere in the region, the Mexican peso strengthened as the Bank of Mexico announced it would support the currency by selling dollars on days when the peso dropped by 2 percent. The central bank’s move is intended to curb volatile swings in the exchange rate, a result of recent eurozone worries. That news was only bolstered by renewed hope that European leaders will do more to contain the crisis there. The peso gained 3 percent for the week. All told, it was a strong week for U.S. investors abroad. The MSCI Europe index closed up 5.41 percent, and the global average for U.S. investors was a 1 percent gain for the week, a reversal of recent trends.
Macro Notes French and German stocks in particular soared, making double-digit gains. Spain and Italy, the crises most recently in the spotlight, also enjoyed double-digit gains over the week. The euro gains seem small next to some of the eastern European currencies. In particular, the Hungarian forint, Czech koruna and Swedish krona all appreciated over 4 percent against the dollar, resulting in bonus gains for the respective USD-denominated indexes.
Macro Notes All eyes were on China, where manufacturing activity slowed in November to a level consistent with contraction. Those looking for a soft landing may laud the Chinese central bank’s ability to orchestrate a soft landing, while others are expecting something much more severe. The outcome remains to be seen, but it’s clear the Chinese are unsure of the impact of the European sovereign debt morass, as they swiftly changed course from their tightening crusade and lowered reserve requirements for banks, a clear signal it was looking to spur growth, not slow it. The mixed signals out of Beijing were shrugged off by a market thirsty for good news from Europe. The announcement Wednesday of coordinated global liquidity efforts sparked a dramatic rally that sent Asian markets up across the board. The best-performing markets were Australia and Korea, whose respective 13.25 percent and 11.32 percent U.S. dollar-denominated gains were the clear standouts among several strong performers. While all is clearly not well with Australia’s economy, and its dependence on China is all too evident, the country is taking many of the right steps to shore up its fiscal shortcomings by cutting spending aggressively. After a week of massive gains, investors would do well not to ignore certain warning signs. Also, the Korean and Indian markets were both able to shrug off disappointing data to register strong gains. Meanwhile, some Asia economies are taking a proactive policy approach to the impact of European contagion, as Thailand and the Philippines both instituted rate cuts in the past week. Both currencies finished the week markedly higher in dollar terms despite the announcements, pointing to some short-term aversion to dollar/Asian currency crosses.
Macro Notes Brazil brought optimistic news to foreign investors with the removal of the 2 percent tax on equities inflows. Of course, with the removal of the tax, trading inflows are expected to increase significantly, bringing a positive note to the end of 2011 for the Latin American nation. The government also announced a broad range of tax cuts and financing measures to encourage growth of the Brazilian economy. In Chile, concerns are brewing that the country may miss its target for 5 percent economic growth in 2012. Never mind that such expansion would be amazing for developed nations in the current environment. These concerns have most recently been emphasized by the country’s finance minister, who is pushing the central bank to consider cutting interest rates to counter the effects of the European sovereign debt crisis. Regardless, the Chilean peso gained against the dollar last week as investor optimism rose. Mexico also brought some surprising news to investors, as it reported stronger-than-expected third-quarter growth. The news has spurred economists to raise their forecasts for expansion of the nation’s 2011 gross domestic product to 3.82 percent. But, as of now, economists still expect the Mexican economy’s growth to be flat in 2012. As the sovereign debt crisis in Europe continues, it seems that central banks will play the major role in placating investors, as government solutions are perceived as lackluster.
Macro Notes Local returns for Egypt’s equities got additional good news. Two-day parliamentary elections garnered a strong turnout, and voting was peaceful and orderly, according to international election monitors. The complex process will continue into 2012, but the auspicious beginning was welcomed following recent bloody unrest in Cairo. Yields on Egypt’s sovereign debt moved decisively lower on the news, with one-year debt fetching 3.9 percent at auction, against expectations of 5.25 percent expectation. Amid sovereign debt contagion fears, the lower yields can only help local equities. U.S. investors in South Africa got extra juice from an appreciating rand. Currency traders reacted to an unexpected increase in the purchasing manager’s index, which signaled brightening growth prospects for the country. The rand might also have been buoyed from monetary loosening by governments of other emerging markets, namely China and Brazil.
Macro Notes Also, on Friday the U.S. Labor Department reported that the U.S. added 120,000 jobs in November, and it revised upward data in October and September as well. The unemployment rate meanwhile fell to 8.6 percent. Despite the favorable jobs report, the markets were flat Friday, likely due to uncertainty surrounding the details of the latest plan to solve the European debt crisis. The Canadian employment picture took a turn for the worse, with the rate of joblessness rising to 7.6 percent. Nonetheless, the loonie appreciated relative to the greenback, following the rush to risky assets earlier in the week. Look for the U.S. and Canadian markets to continue to take their cues from news coming out of Europe. Germany and France remain opposed to printing their way out of the crisis, despite pressure from Washington, D.C. Thus, any proposed plan will be closely scrutinized for its ability to stem further spreading of the crisis. |
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