Whenever I do my currency research, I not only track the economic data of each country but I also listen to the comments and the tone of their governments as they assess their economies. This can tell you a lot about investor sentiment going forward as it concerns currencies.
So, I want to point out some of the comments from the past week and what they spell out for the U.S. dollar, yen, and the Aussie dollar.
On April 26, the G-7 (Group of Seven nations) released a statement that said they predicted "that a weak economic recovery will start to take hold in the coming months as evidence mounts that the worst of the recession is over."
That's a pretty bold statement coming as the seven largest industrialized nations met and discussed the economic situation in their own countries as well as the larger global economy.
Next, on April 29, the Federal Reserve decided to keep interest rates unchanged at near zero percent. But then Fed Chairman Ben Bernanke went on to comment about some "green shoots" in the economy.
The market really latched onto these words as an indication that the worst of the storm is over and that the beginnings of a recovery may start soon and pull us out of the recession in the months ahead.
Then the final statement was put in place by Paul Volcker, former Fed chairman and the current chairman of President Obama's economic team.
On May 1, Volcker stated that "the economy is close to a bottom and there probably won't be a need for more fiscal stimulus." He went on to say that, "I'm not here to tell you that the economy is going to recover very strongly in the short run, but there is reason to believe that it should be leveling off soon, at a low level."
So, within a week you had a consensus from the seven largest nations in the world, from the Federal Reserve and from a former highly respected Fed chairman who helped to pull us out of a horrible economic slump in the 1980s.
All of these comments point to a shift in investor sentiment as they take their defensive players off the field and slowly replace them with their offensive players.
Who are these when it comes to currencies?
The defensive players are the dollar, yen, and the Swiss franc. They were the most beaten down of any major currencies. Therefore, they benefitted as investors clung to value in hopes that something so beaten down wouldn't fall or would at least fall less than currencies that have been bid up so high the last few years.
The offensive players are the countries that historically have higher inflation and higher interest rates to fend off the higher inflation. While none of them have high rates right now, as growth and inflation return to the global economy you will see their currencies benefit as investors believe that higher rates will return over time.
These currencies are the euro, British pound, and Aussie dollar for now, but they will also come to include the Canadian and New Zealand dollars secondarily, too.
So, as these government officials make statements of hope for the future, there is very little incentive to keep the defensive plays on and there starts to be more of an incentive for the offensive players to come back out onto the field.
As a result, you will see the dollar, yen, and franc fighting an uphill battle in the months ahead. You'll also see the euro, Aussie, and pound start to have the wind to their back once again, in the months ahead.
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