Currencies | Jun 17 2011
– Weak recent US economic data priced into US dollar
– Further depreciation unlikely according to CIBC
– Softer wage gains are helping real US dollar rate adjust
By Chris Shaw
Recent factory orders and purchasing managers' data out of the US has been disappointing, while unemployment continues to rise and the housing market is still weak. This leads CIBC World Markets to suggest final demand in the US economy will be sluggish in the second quarter.
To reflect the data CIBC has revised down growth forecasts for GDP for the period to 2.4%, though the group notes this is still above the 1.8% growth recorded in the first quarter.
According to CIBC this growth expectation is now priced into currency markets, with the view being the Fed will not tighten throughout the next year. CIBC's long-held expectation has been for no rate hike until 2013.
In contrast, CIBC suggests the euro could struggle due to changing expectations in coming months, as there has been a quick end to a short-lived rate tightening cycle by the European Central Bank and economic data in the region is likely to deteriorate in the second half of the year.
Looking forward, CIBC expects second half economic growth in the US will top the average of the first half, as activity should lift in the absence of any further upside in oil prices and a repairing of supply chains from Japan. There could also be a bump in capital investment spending thanks to an accelerated depreciation allowance due to expire at the end of the year.
A weaker US dollar has been a key catalyst in redirecting growth from households with over-leveraged balance sheets to exports and related capital spending. But when assessing real exchange rates, which account for inflation differences, CIBC suggests the weaker US dollar trend may have run its course.
The US dollar is currently at an all-time low from a real exchange rate perspective, which is helping boost the competitiveness of US exports. While the greenback may need fall further against some Asian and emerging market economies, CIBC sees less scope for more declines against major currencies.
This is due to softer wage gains in the US relative to major trading partners, CIBC noting this is putting less pressure on the need for further depreciation in the nominal level of the US dollar. Softer wage gains should effectively adjust the real US dollar exchange rate in CIBC's view, especially given the contrast to currently fast rising wages in China.
This opens up the potential for a rebound in the US dollar according to CIBC, as investor attention is likely to shift to economic growth risks elsewhere in the world.
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