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Dealing with the Dollar: Protect what you've got

Posted By World First Currency, Wednesday, June 3, 2015
Updated: Wednesday, June 3, 2015

Despite a recent slump the dollar is still performing well this year. Sure it was stronger a month ago but the latest run of USD weakness is nothing to get too scared about in the longer term. In the past 12 months it is still 9.5% stronger against the Canadian dollar, 15% stronger against the yen and 18% better off against the euro.

 

Timber, much like gold, oil, copper or cement is a commodity and timber prices have fallen as the US dollar has strengthened and the global economy has wobbled. Timber futures on the Chicago Mercantile Exchange are down 29% on the year. For importers that is great, for producers that is worse news. 

 

Recent noises from the Federal Reserve have shown a central bank eager to push back on rate expectations that had interest rates increasing this year. And push back they did. Estimates of inflation, growth and unemployment have all been revised sharply lower through 2015 with the key outlook for inflation only being seen to hit target in 2017 vs 2016 in the previous round of forecasts released in December.

 

Market expectations are that a rate rise could happen as early as September but those will only be secured if wages and inflation measures start to improve through the summer. If they don’t, then you have to think that the USD is going to be giving up more of its gains.

 

Anyone who buys or sells internationally, will be affected by the movements between pairs of currencies – in other words, it’s not just a ‘big business’ problem. Regardless of the size of your business, dealing internationally brings risks as well as rewards and can directly affect your bottom-line.

 

Hedging is the answer. It’s a way to protect your business from this market volatility and save your bottom line – and no matter how big or small, every business has a bottom line. This is done through a ‘forward contract’ which allows you to buy or sell a foreign currency at a predetermined price for a specified period of time. They are the only way to help you plan and forecast so that you don’t get caught out.

 

At the end of the day, the strength of the USD has been great for timber importers but the gains cannot be depended upon in perpetuity. Locking in and protecting your business is the safe, sensible way to make sure that cuts are made in the wood and not your profits.

 

To learn more about World First, please visit them here.

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Weekly Update for April 27, 2015

Posted By John Min, PhD, Tuesday, April 28, 2015

USD: Dollar rally slumps

The economy slumped last week when the market realized that the strong dollar continues to create drag on growth. Durable Goods Orders – purchases lasting two to three years such as appliances and trucks – rose in March from the previous month. But, when volatile transportation components are stripped away, the core orders surprisingly dropped 0.2% in March. This was the largest monthly drop since December 2012, and the 6th consecutive decline in so many months. This doesn’t bode well for those who want the Fed to hike the rates this year.

 

This week, the 1st quarter Gross Domestic Product report will be released on Wednesday morning, followed by the Fed’s policy statement. I have no doubt the market will be parsing the statement to see if the Fed is concerned about the dollar’s impact on the economy. And if they are, I expect the dollar to set new lows this week.

EUR: Greek bailout drama continues


The euro climbed to a near 2-week high last week despite the Eurogroup refusing to give any bailout loan to Greece. Apparently, Greek Finance Minister Varoufakis took a “hammering” on Friday for a lack of details on his proposed austerity program.

The next meeting is scheduled for May 11th. Coincidentally, a cash-starved Greece has to make €780 billion debt payment to the IMF on the following day. So, I expect the Greek debt crisis will continue and cap the euro at the current level.

Meanwhile, the April Purchasing Manager Index measures missed the market expectations last week. It seems the recovery is lacking momentum despite record bond purchasing and low-interest rates. And, on Wednesday, we’ll see if there is any sign of a pickup in consumer inflation.

GBP: The pound may go higher

The pound climbed to a 7-week high last week. The Bank of England’s April meeting minutes were surprisingly upbeat. In fact, policy makers specifically noted that the currency strength may have already fed through the economy, implying that this will put less downward pressure on prices.

So, when the effects of recent declines in energy prices fade in the coming months, the prices should pick up faster toward the bank’s target rate of 2%. This suggests that the Bank’s next policy move will likely be a rate hike. And, this will be pull the pound higher towards its fair value.

This week, we have the first release of Q1 Gross Domestic Products report tomorrow. If the report shows a strong growth, then I expect the pound to climb higher despite the concerns over the May 7th election.

CAD: As oil prices go up, the loonie could follow


The loonie traded sideways near a 4-month low last week. Bank of Canada Governor Poloz’s recent comments have been more upbeat, which actually doesn’t surprise me. Spring economic data has turned markedly positive, suggesting that the negative impact of lower oil and commodity prices may be dissipating.

So, I’m betting that the Bank will refrain from making another rate cut to see if the data continues to improve in the coming months. And, if oil prices recover particularly in response to a surge in summer driving demand then the currency pair has a good chance of going lower.

This week, the February Industry Gross Domestic Product report will be released on Thursday. I expect to see the last of a negative month-on-month growth rate. Stay tuned.

AUD: Reserve bank may surprise the market - again?

The Aussie dollar climbed last week on the speculation that the Reserve Bank may refrain from cutting the bank rate on May 5th.

If the speculation turns out to be correct, it’ll be a big surprise because most investors have already priced in another rate cut. The latest Bloomberg survey reported that 23 of 26 analysts expect the Reserve Bank of Australia to cut rates on May 5th. And, the futures market has already priced the rate cut.

But there is no sure thing in the currency market. The Reserve Bank surprised the same analysts in March by not cutting the rate. So, I’ll be paying close attention to the Bank Governor speech today to see if the speculation has any merit.

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How to Operate in a Strong Dollar Environment

Posted By John Min, PhD, Wednesday, April 22, 2015
Updated: Monday, April 20, 2015
As a leading international payments company with operations in major financial centers around the world, World First works with tens of thousands of importers and exporters to help them transfer funds across currencies. Therefore, we are acutely aware of how a surging US dollar has significantly affected many of our clients’ top and bottom lines.

 

As a quick market overview, Continental Europe and Japan have been mired in a disinflationary stagnation since last year.  This has resulted in tight credit, low investment, and weak consumer spending.  In contrast, robust consumer spending and improving labor markets in the US and UK have allowed those economies to expand and recover the losses incurred during the 2007-8 recession.

 

This divergence has rallied the US dollar relative to a basket of foreign currencies by 18 percent since July, and as a consequence, reduced exporters’ overseas earnings while decreasing the cost of imports.

 

$ INDEX (NYBOT:DX) Futopt Chart

 

 

Looking forward, the World Bank forecast the US economy to grow 3.2 percent this year.  In comparison, the Eurozone and Japan are forecast to grow 1.1 percent and 1.2 percent, respectively.  A stronger economy and higher US interest rates will continue to support the dollar rally this year.  As consequence, QuERIDATA, a leading global industry forecasting firm, projects the US market demand for Reconstituted Wood Products (NAICS6: 321219.1) in real or price-adjusted terms will grow 3.0 percent this year.

 

Market Demand measures production plus imports less exports.

 

 

Meanwhile, a strong dollar is expected to put downward pressure on export volume of Reconstituted Wood Products.  QuERIDATA forecasts the real export growth rate to decline by -6.8 percent this year and another decline of -1.6 percent in 2016.

 

 

In contrast, the import volume of Reconstituted Wood Products is forecasted to grow by 1.6 percent this year on the back of a recovering economy.

 

 

Against this backdrop, it is important for importers and exporters to factor in currency trends in their planning and budgeting processes and keep a close eye on market movements to mitigate potential negative effects of sharp currency movements this year.    

 

One simple way to achieve this is by taking advantage of no-cost forward contracts. With a forward contract, an importer or exporter can lock in a rate for specified amount of funds when the exchange rate is favorable with their bank or payments company and make the transfer when it is due on a future date - usually up to one year in advance.  This way, any unexpected currency movements will not affect the budgeted revenue or costs and help eliminate a potential budgetary headache this year.

 

John Min is the Chief Economist at World First USA.  To learn more about World First, please visit them here.

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