The US$ continues to remain under intense pressure, falling to new all-time lows against the euro and Swiss franc, while plunging to two-year lows against the yen. The greenback continues to weaken as a slew of negative factors continue to push the US$ lower. Yesterday, US mortgage giant FNMA reported that it would report a massive loss as a result of rising defaults. This news adds to an already edgy market following reports over the past several weeks from many US banks citing similar woes and write-offs in their sub-prime lending portfolios. With the US housing market in disarray, the market is looking to the US Fed to cut rates when they meet again on December 11th. Following the release yesterday of minutes from the Fed’s meeting on October 31st, there was little to deflect the market from this view of lower US interest rates. Rather, the Fed helped reinforce the view of lower rates when it reduced its US growth forecast for 2008 to levels below 2.0%. Adding to the markets woes about a declining housing market and slowing economic growth, the price of crude oil continues to spiral to levels near $100 per barrel. With the US$ ever weakening, crude oil prices continue to skyrocket. This overriding mix of negative news continues to propel the US$ lower as the Thanksgiving holiday approaches. There is some limited US economic data scheduled for release today that is unlikely to have any significant affect on the overall US$ trend. At 10:00 a.m. U. of Michigan Confidence expected to register 75.0 and Leading Indicators expected to decline 0.3% are slated for release. Earlier this morning, Weekly Claims were released in line with expectations at 330,000.
The euro continues to drive higher paced by several varying factors. News in the market yesterday suggested that various Middle Eastern Central Banks are looking to remove their local currency pegs to the US$, in addition, OPEC has discussed selling oil contracts in euros rather than the US$. These factors coupled with the prospect that the ECB will soon resume hiking interest rates all support the common currency. With growth continuing to surge throughout the Eurozone, coupled with mounting inflation pressures, ECB officials continue to posture towards higher rates. This hawkish rhetoric continues to drive the euro higher.
The yen surged overnight, pushing the US$ to two-year lows, as weakness in global equity markets continue to force investors to remove risk from their portfolios. The yen has adopted a proxy role for investor sentiment as it continues to be used as a favored financing vehicle in the “carry trade.” As investor risk ebbs in the market and traders liquidate equity positions, the yen has gained. There is currently a 0.9 correlation between the direction of the yen and the course of global equity markets. With significant investor unwinding of equity positions still likely, we could see the yen continue to firm over the next several months.
The pound fell modestly overnight as investor unwinding of carry trades prompted sterling selling. With the market trying to determine the direction of UK interest rates over the next several months, traders looked to the release of minutes from the last Bank of England policy meeting. The BOE voted 7-2 to hold rates steady, suggesting that the Bank’s bias could be shifting towards a rate cut early next year. Expectations of lower UK rates should drive sterling lower over the next several months. However, in the interim sterling’s fortunes will likely be tied to the course of the “carry trade” unwind and the overall trend of US$ weakness.
Many currencies were affected overnight as traders unwound “carry trade” positions aggressively ahead of the Thanksgiving holiday as a global equity market rout ensued. The Swiss Franc long a substitute in the “carry trade” due to the low carry costs of the currency surged to all time highs against the greenback as the unwind of riskier positions ensued and the euro set new all-time highs. The high yielding Aussie and Kiwi also fell dramatically against the US$ overnight, each falling over 1.0%, as investors shed positions in these higher yielding currencies amidst reductions in the “carry trade.”
