The US$ continues to remain under pressure following the Thanksgiving holidays as investors remain focused on a slew of negatives lined up against the greenback. With the US economy slowing significantly paced by a sharp drop in the housing sector, the market remains convinced that the Federal reserve will again slash rates 25 basis points when it meets on December 11th. With lower US rates very likely, investors continues to shun the US$ en masse. A lower greenback has led to active discussions in the market about a shift in the global reserve mix of Central banks coupled with active talk about shifting the US$ basis for many long-held trading vehicles. Many Middle Eastern nations continue to debate the possibility of unpegging their currencies to the US$. In addition, OPEC continues to openly debate the prospect of pricing oil in currencies other than the US$. As these negative elements continue to pervade markets there remains an overriding concern about the weakness of credit markets and the overall health of the US banking system. These factors have led many investors to look to prospect of low US interest rates for some time. This environment has prompted a shift away from the yen and Swiss Franc as a preferred vehicle for the “carry trade” and has really begun to weigh on the US$ as it emerges a “carry trade” substitute. This use of the US$ as an emerging preferred vehicle in the “carry trade” was reinforced by the 17.0% return a basket of currencies including the British pound, Brazilian Real and Hungarian forint returned against a “short US$” funded position vs. returns of 9.0% using the yen and 7.0% the Swiss franc. The view of a “free falling” US$ seems to continue to weigh on the greenback and reinforce the many negatives. The market will be looking to US economic data slated for release this week, to help further gauge the level of economic decline in the US economy. There is no data slated for release today, however, Consumer Confidence is slated for Tuesday release and expected to register 91.0. Wednesday sees the release of Durable Goods and Existing Home Sales. Thursday yields releases of GDP and New Home Sales, while the week winds to a close with the releases of personal income and spending as well as construction spending and Chicago PMI. This continual flow of data should help steer trade, with the US$ already being given a boost by better than expected weekend holiday retail sales.
The euro steadied in ranges overnight, despite the announcement last week by the ECB that it is prepared to pump additional liquidity into Eurozone money markets as credit tightens. This announcement by the Central Bank appears to have had little affect on trade, however, could weigh on markets as the week progresses and investors scale back the timing of future policy actions from the ECB. Any money market action by the ECB will certainly prevent the Bank from hiking rates. A rate hike by year-end had been priced modestly into markets and as these expectations unwind we could see the euro come under some modest pressure. In addition, the euro could weaken following the release of the German Ifo survey of business confidence slated for tomorrow. The survey is expected to fall to 22-month lows as rising oil prices worry investors. However, any declines in the euro will likely be limited as investors continue to shift assets into the common currency as an emerging substitute for the US$.
The yen consolidated in recent ranges overnight as the “carry trade” continues to dominate capital flows with the Japanese currency. As global equity markets stabilize, investors use the Japanese currency to finance positions in higher yielding asset classes. The converse applies when volatility ensues in these markets and investors quickly vacate these positions financed with yen, helping bolster the currency. The yen was helped higher overnight was after the announcement by the China Investment Corp. of its intent to begin buying Japanese equities. The Japanese news agency Nikkei reported that the China Investment Corp. was advertising for a portfolio manager to invest some $67 billion of the country’s reserves in Japanese equities. This apparent shift into Japanese equities, coupled with an increase in global portfolio risk should continue to help bolster the yen as the “carry trade” eases significantly in the market.
The pound also consolidated overnight as investors jockey positions around interest rate expectations. With the US Fed all but certain to cut rates in two weeks, the pound continues to emerge as a higher yielding alternative. However, with the prospect of an increased fallout from sub prime losses at UK banks and the possibility of a slowdown in UK housing market, the market has begun to speculate about the timing of any interest rate shift by the Bank of England. Investors will certainly continue to parse comments from BOE officials, but will also certainly look to the flow of economic data to help verify this policy action. This uncertainty will continue to steer sterling in wide looping ranges.
