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Yen Rises to 3 Year Highs, What can help the US$?

The US$ has fallen to new lows against a basket of currencies, weakening across the board as comments from Chairman Bernanke failed to offer confidence to the market or the US$. The weakness in the US$ has come as data continues to disappoint economists’ expectations in more than just the housing sector. At 8:30 a.m., data on personal income and spending showed better than expected growth, rising 0.3% and 0.2%, respectively. Economists were expecting gains of 0.2%. Additionally, the personal consumption expenditure, which is the Fed’s preferred measure of inflation, rose 3.7% in January, compared with expectations of 3.5%. The market is likely to disregard slightly higher inflation figures, as prospects for growth are emphasized. The market will look forward to data later today on manufacturing and the consumer. Chicago purchasing manager’s index will be released at 9:45 a.m. and is expected to read 49.5, which shows manufacturing contracted in January. Additionally, the University of Michigan’s reading of consumer confidence will be released at 10:00 a.m. The measure is expected to gain slightly from January to 70 from 69.6. Equity markets are indicated sharply lower again this morning, with the Dow Jones Industrial pointing nearly 1% lower on the open.

The euro continues to make new, all-time highs each day as the prospect for a US$ recovery in the near term diminishes. Overnight, data showed that Eurozone consumer prices remains elevated, rising in January to 3.2% from 3.1% in December. Elevated inflation will continue to keep the European Central Bank holding interest rates steady despite the prospects for slower economic growth. It appears, at least in the near term, that the best hope for a US$ recover lies in some verbal intervention from European finance ministers, which could take many forms and is likely to occur as early as this weekend. A coordinated effort might help place at least a near-term top on the euro. Without such a move, however, it becomes likely that the move will continue to extend itself further.

The yen continues to gain substantially against the US$ as equity markets experience pressure. In the current economic environment, investors continue to flee from higher-yielding currencies, which has helped the yen gain as carry trades are pared back. Financial news overnight continued to show that markets are strained, which should lend further support to the yen.

The pound is weaker overnight after disappointing news from the U.K. housing sector. Nationwide housing prices in February fell 0.5% compared with expectations that prices would be flat. In an annualized measure, prices rose 2.7%, compared with expectations of 3.6%. Weaker house prices in the U.K. is likely to bear the same impact as in the U.S., impacting consumers and causing overall economic weakness. This should lend support to expectations that the Bank of England will continue to lower interest rates over the course of the next few months.

US$ Falls to New, All-time Lows Against Euro and Swiss Franc

The US$ weakened to new all-time lows against the euro overnight as traders continue to shun the US$ en masse. This mass exodus away from the US$ has occurred as investors shun the greenback amidst a slowing US economy and the increased likelihood of significantly lower US interest rates. Later this morning at 10:00 a.m., US Fed Chief Ben Bernanke is poised to deliver his semi-annual testimony before Congress on the state of the US economy. The market is expecting Bernanke to paint a less than rosy picture and increase his dovish outlook for US interest rates. The market has currently priced in a 92.0% probability that rates will drop 50 basis points by the Fed’s March 19th meeting, with an additional 87.0% probability assigned to another 25 basis points in cuts by the April 30th meeting. With the market expecting steep rate cuts from the Fed, all eyes have now focused on the release of US economic data. Durable Goods orders were released earlier this morning posting a greater than expected decline of 5.3% vs. expectations of a 4.0% drop. New Home Sales are to be released at 10:00 a.m. expected to decline 0.7% to 600,000 units. This data should only reinforce the dire situation facing the US housing market. With continued bad news expected for the next several months, the US$ is likely to remain under significant pressure.

The euro surged to new all-time highs against the US$ overnight, as traders exit the greenback and buy the Eurozone common currency, as it has become a seeming surrogate for market participants. With global commodity prices gaining, amidst a weakening US$, investors continue to shift assets away from the greenback in an effort to minimize the effect of these price gains. As surprisingly better than expected confidence data was released yesterday in Germany, the market has adopted the view that Eurozone growth can withstand an US slowdown. This view has supported the ECB’s current interest rate stance of holding steady, adding further momentum to capital shifts in favor of the euro. Expect the euro to remain well supported for the next several months, however, current levels could lead to some discomfort amongst European policy makers, ultimately leading to volatile trade.

The yen gained overnight as traders again shift away from yen financed positions and square the “carry trade.” With US equities poised to open lower this morning as US economic growth appears to being slowing significantly, traders seem almost certain to exit these riskier trading positions financed with yen. Adding to the market’s woes and exiting of short yen positions is the seeming current rout of European bourses. As traders exit these riskier positions, the yen will gain. Expect this ebb and flow of the Japanese currency in volatile ranges to continue for some time.

The pound held steady overnight as traders remain uncertain as to whether extend sterling’s gains further. Recent comments from a slew of Bank of England officials seem to be painting an uncertain outlook for UK rates when the Central Bank meets next week. With a mixed bag of data showing UK growth moderating amidst an environment of accelerating inflation pressures, it is widely expect that UK rates will remain steady next week. The yield advantage afforded by sterling deposits will almost certain buttress the pound for the next few months.

The commodity currencies continue to gain across the board as the recent surge in oil above $100 per barrel and gold nearing $1,000 per troy ounce support these currencies. The New Zealand Dollar has risen to its highest level ever, since beginning a free float 23 years ago, as speculation mounts that economic growth will continue to accelerate and the reserve Bank of New Zealand will continue hiking rates. The Aussie continues to near its 23-year high of last November as traders focus on similar strong Australian economic fundamentals. This surge in commodity prices has not left the Canadian Dollar unaffected. Recent gain in energy prices continue to support the loonie, as the economy remains dependant upon raw material exports.

US$ Looks Poised to Test All-Time Lows vs. Euro

The US$ fell overnight as investors continue to shun the greenback amidst continued bad economic news from the US leading investors to speculate that the scope of US rate cuts could widen over the next several months. The market will almost certainly focus on US economic releases slated for today, as traders attempt to gauge the Fed’s next policy stance. Yesterday the US released existing homes sales data, revealing a decline to the lowest levels in almost a decade. This data, showing declines in housing was reinforced by a report released by the US firm RealtyTrac this morning, showing that US home foreclosures jumped 57.0% from January of 2007. This weakened housing market has led many investors to speculate that the Fed will slash rates 50 basis points when it meets on march 19th. Currently Fed Funds Futures have indicated a 92.0% probability that such a cut will occur, with an 8.0% probability assigned to the chance that rates will drop 25 basis points. Helping further steer these expectations will be testimony from Fed officials this week. Later today at 12.15 p.m. Fed Vice-Chairman Donald Kohn will deliver a speech on monetary policy in North Carolina. This speech comes a day before Fed Chief Ben Bernanke delivers his semi-annual Humphrey Hawkins testimony before Congress on the state of the US economy. Adding to this testimony, traders will be focused on the release of US economic data today. PPI was released earlier this morning, gaining a modest 1.0% vs. expectations of a 0.4% gain. Despite this modest gain in inflation pressures, there will likely be little to alter the Fed’s policy stance. The market will also be focused on other data slated for release later this morning. S&P Schiller releases its Housing Price Index at 9:00 a.m. expected to decline 9.7%. Later this morning at 10:00 a.m., Consumer Confidence is to be released expected to decline sharply to 82.0. This environment of weakened housing and declining consumer confidence will weigh on the US$ for some time.

The euro gained overnight after the release of surprisingly better than forecast data from Germany overnight. The Ifo index of German business confidence unexpectedly rose to 103.4 in January vs. a forecast drop to 102.9. This data reinforces the view that the Eurozone economies are somewhat weathering the global economic slowdown, which will likely keep the ECB in a neutral rate policy posture. This view continues to drive the euro back to levels near its all–time highs as the interest rate yield differential continues to favor the common currency. With inflation pressure remaining in place and economic growth holding steady throughout the Eurozone, the interest rate differential favoring the euro is likely to widen over the next several months as traders drive the common currency to new all-time highs.

The yen continues to oscillate in recent ranges, as the Japanese currency remains a proxy for global risk. With investors looking to the “carry trade,” the yen continues to move in tandem with financing expectations and the market’s appetite for risk. Expect this pattern to define trade in the Japanese currency for some time.

The pound gained overnight following comments from the Bank of England Deputy Governor Rachel Lomax. Ms. Lomax stated that she remains concerned that quickened inflation pressures will become embedded in the economy and limit the scope of rate cuts the Bank could undertake to stimulate economic growth. With a narrowed expectation now surfacing for further rate cuts from the BOE, traders are again favoring the pound on a yield supportive basis. With at least another 75 basis points in Fed rate cuts being proceed into the market, this yield advantage should continue to bolster sterling over the next several months.

U.S. Housing Expected to Fall to 10 Year Low, US$ Remains Weak

The US$ continues to remain under pressure across the board as weak US economic data coupled with expectations of lower US interest rates continue to weigh on the greenback. The market will be watching the flow of economic data this week and the semi-annual testimony from Fed Chief Ben Bernanke on Wednesday and Thursday to further steer the course of the US$. When Bernanke begins his semi-annual testimony before Congress on Wednesday, the market will look to parse his words to ultimately determine the Fed’s view about the US economy and the extent of further rate cuts from the US Central Bank. The market has now priced with a 98.0% probability the likelihood of a 50 basis point cut from the Fed at its March 18th meeting, with a 78.0% chance added to the likelihood of an additional 25 basis points in cuts by the April 30th meeting. With the market clearly expecting further steep rate cuts from the Fed, traders will be watching the flow of data this week. At 10:00 a.m. this morning Existing Home Sales are to be released, expected to decline 1.8% to 4.80 million. Tomorrow sees the release of PPI, Consumer Confidence and the S&P/Schiller Home Price Index. Wednesday yields New Home Sales data, while Thursday sees the release of 4th quarter GDP. Finally, the week winds down with release of Chicago PMI and U. of Michigan Confidence.

The euro remains firm against the US$ as traders continue to speculate that strong Eurozone growth coupled with mounting inflation pressures will force the ECB to maintain a steady interest rate policy. With Eurozone interest rates now higher than those in the US and the US Central Bank likely to continue to push rates lower in the early part of this year, the euro should remain well supported. However, this scenario could become some what disjointed this week, as Germany releases its Ifo survey of business confidence tomorrow. This index is expected to drop to the lowest levels since January 2006 as a weakened credit market coupled with rising energy prices inhibit Eurozone business. However, it will ultimately be the interest rate differentials between the US and Eurozone which continue to support the common currency.

The yen fell overnight, as traders have again shifted cautiously into the “carry trade.” With global equity markets seemingly recovering, traders have again reentered positions using the low yielding yen as a preferred financing vehicle. Expect the yen to continue to be used to finance these “carry positions,” as trader appetite for risk increases. This ebb and flow of risk and the use of the yen as a proxy for this risk will continue to determine the direction of Japan’s currency.

The pound gained modestly overnight as traders focus on interest rate differentials despite the release of data showing a decline in UK housing prices. As traders remain focused on overall UK economic growth, a recent spike in inflationary pressures has led many to speculate that the BOE will refrain from further rate cuts in the near-term. This view has helped support the pound, as traders remain squarely focused on the longer-term yield advantage of sterling deposits.

US$ Continues to be Under Pressure

The US$ continues to remain under pressure as investors have become all but convinced that the US economy is heading towards recession. With yesterday’s release of a significantly lower than forecast Philly Fed Survey, speculation continues to swirl that the Fed will need to continue lowering interest rates. The market has currently priced in a 90.0% probability that rates will drop 50 basis points by the March 18th meeting with a 10.0% probability assigned to the chance that rates will drop 75 basis points. Expectations of lower US rates will continue to weigh on the US$, as traders look to an ever widening spectrum of interest rate differentials. With no US data slated for release today, expect the US$ to consolidate its losses from this week.

The euro continues to post gains against the US$, as traders focus on the diverging interest rate environment between the US and Eurozone. An industry report released overnight showed that growth in European service industries accelerated more than forecast in February. This report ties in with the market’s view that inflation is accelerating within the Eurozone, further reinforcing the view that the ECB will hold rates steady. As traders remain focused on this differing growth and interest rate outlook, the euro will remain well supported.

The yen continues to trade in tandem with the overall direction of global equity markets. With the “carry trade” remaining a constant in steering the direction of the yen, the Japanese currency remains a proxy for global risk. As markets appear to stabilize and traders cautiously reenter “riskier” positions the yen comes under pressure, pushing the US$ higher. The converse occurs, as risk is unwound from investor’s portfolios. Expect this pattern to continue for some time, keeping the yen relegated to wide ranges.

The pound continues to gain against the US$ as mounting inflation pressures could lead the Bank of England to refrain from further rate cuts this year. With the Bank of England now seemingly pausing in its rate cutting cycle, amidst signs of continued consumer spending, the pound will continue to post gains against the US$.

US$ Continues to be Weighed Down by Negative Fed Talk

The US$ diverged in direction overnight falling against the euro and pound while gaining against the yen, as traders remain fcused on diverging interest rate scenarios and growth outlooks. Yesterday the US Fed released the minutes from its two previous policy actions, when rates were cut by a total of 125 basis points. Citing concerns about a detoriating credit environment and the prospect for the US economy to move into recession, the Fed aggressively slashed rates. These two policy actions signaled the deepest Fed rate cuts in over two decades, as the US housing market posts the worst decline in over 25 years, weighing on consumer spending. These lingering concerns have led the market to speculate that US rates would drop further by the March 19th meeting. Currently futures markets have assigned an 84.0% probability that rates will drop 50 basis points, with a 16.0% probability assigned to the prospects that rates will drop 25 basis points. The US released weekly claims data this morning in line with expectations at 349,000, however, the four-week moving average surged to the highest levels in over two and half years signaling further weakness in the jobs market. The Philly Fed survey and Leading Indicators are both slated for release at 10:00 a.m. this morning expected to register –10.0 and 0.1% respectively.

The euro gained modestly overnight after yesterday’s surge following comments from the US Fed yesterday signaling concerns about US growth prospects and the overall state of the US economy. These concerns from the Fed should keep US interest rates low for some time, a stark contrast to the rate environment within the Eurozone. As Eurozone economic growth remains steady, the ECB under the guidance of Trichet is unlikely to shift rates lower any time soon. This continued divergence in interest rates would likely continue to support the euro.

The yen continue to come under pressure as investors aggressively shift capital into other markets, using the yen as a preferred financing tool. Low Japanese interest rates continue to support borrowing in yen, through the “carry trade” prompting the currency to push lower. Recent recoveries in global equity markets as well as a surge in oil above $100 per barrel have all prompted the reemergence of the “carry trade.” Expect the “carry trade” to continue to steer the direction of the yen over the next several months.

The pound surged overnight after the release of data showed that UK retail sales surged at the quickest pace in over a year. This data seriously weakness the prospects for further rate cuts from the Bank of England, as it all but affirms the resiliency of the UK consumer. With the likelihood that UK rates will remain steady, investors are again shifting capital into the UK as interest rates continue to favor the pound.

Greenback Stays in Recent Ranges Ahead of FOMC Minutes Later

The US$ gained against other major currencies overnight before the release of CPI and housing data today. Yesterday, concerns were renewed that financial institutions and banks would have additional writedowns, sparked by increasing losses from bets on the U.S. subprime market. The CPI data, which was released at 8:30 a.m., was expected to show that inflation accelerated to an annualized pace of 4.2% on the core number and 2.4% excluding food and energy. It confirmed expectations of accelerating, rising 4.3% and 2.5% excluding food and energy. At the same time, housing starts were expected to show a slight rise to 1010K from 1006K, while building permits were expected to fall slightly from 1068K to 1050K. These numbers showed in line readings, with starts rising 1012K and permits rising 1048K. Beyond these figures, the market will parse through the release of the minutes from both the Federal Reserve’s emergency cut and the January 30th meeting. The minutes, which are scheduled for release at 2:00 p.m., should give the market a keen understanding of the rationale behind the Fed’s 125 basis points of cuts in slightly over a week. The news is likely to continue to paint a downbeat picture of the U.S. economy. Yesterday, crude oil continued its rise, closing over $100 a barrel for the first time ever. Rising commodity prices, from both food and energy sources, will continue to pressure the U.S. economy, as inflation rises and stifles growth prospects.

The euro was lower overnight after continued concerns over the global credit crisis help to prop the greenback as a safe haven currency. With equity markets falling throughout the globe, investors flee to the safety of U.S. treasuries, causing a demand for the dollar. In a broader trend, however, the US$ has been moving in just over a 4% range since November, sitting now in the middle of that range. The downward pressure on the US$ remains the broad, overall trend. However, should the market begin to focus on future growth instead of interest rate differentials, the US$ could see slight periods of strength.

The yen continues to oscillate between daily strength and weakness on the basis of movements in equity and commodity markets. With the market now using the defunct “carry trade” to fund positions in equity and commodity markets, the yen mirrors their movements, falling on strength and rising on weakness. The recent weakness in global equity markets has not had as much of an impact to cause the yen to strengthen as it has been accompanied by concurrent strength in commodity markets. Should this mixture continue, the yen is likely to trade in recent ranges.

Sterling continues to remain relatively weak against the US$ following the release of the Bank of England’s minutes. At their last meeting, the BOE cut interest rates by 25 basis points as expected. With the release of the minutes, it was revealed that the vote for a rate cut was 8-1, with one member favoring even more of a rate cut. This will continue to stoke speculation that, despite inflation running at the higher levels, the BOE will cut rates to keep the U.K.’s economy from entering the morass that is plaguing the U.S. economy.

Bernanke's Comments Yesterday Highlight Downside Risk to Growth, US$ Falls

The US$ diverged in direction overnight gaining against the pound, while falling against the yen and euro as traders focus on the prospects of a declining US economy. Yesterday Fed Chief Bernanke and his counterpart at Treasury, Secretary Hank Paulson both delivered a downbeat assessment of US economic growth to Congress. The market seems to have embraced this assessment and priced in significant rate reductions by the US Central Bank. Fed Funds Futures have currently priced in a 64.0% probability that rates will be reduced 50 basis points with a 36.0% probability assigned to the prospect of a 75 basis point cut. The market will watch the flow of US data today to continue to gauge the extent of US economic decline. Import Prices rose 1.7% in January, revealing some suppressed inflation pressures. However, the market will likely remain focused on other releases slated for today. At 9:00 a.m. TIC data is to be released expected to show foreign investment in the US declined to $65.0 billion last month. At 9:15 Industrial production and Capacity utilization are to be released expected to register a gain of 0.1% and a reading of 81.3% respectively. At 10:00 a.m., U. Of Michigan Confidence is to be released expected to register a decline to 76.0. The market will likely focus on the Industrial Production and Confidence numbers as traders still determine the strength of the US economy.

The euro continues to gain against the US$ as traders remains focused on slowing US growth and the prospect fro lower US interest rates. With the Fed seemingly committed to pushing US rates lower, while the ECB continues to maintain a hawkish posture aimed at battling inflation pressures, traders, continue to favor long euro positions. This trend of the market opting to hold long euro positions in lieu of the greenback will likely continue through the next several months as the US economic situation continues to decline and rates move lower.

The yen has firmed this morning, as traders are again focusing on the reintroduction of risk to the market and unwinding the “carry trade.” With the yen’s fortunes continuing to be dictated by the direction of equity markets, traders remain focused on the prospect of risk being added to portfolios. Expect the yen to maintain its tight correlation to the direction of equity markets, further adding to wide looping ranges.

The pound fell overnight, snapping five days of gains, as traders unwound some of the pounds recent strength. As the pound has strengthened this week on the belief that the UK economy is expanding at a more rapid pace with inflation pressures mounting, some traders decide to consolidate these gains. Until the Bank of England provides a further cue as to the direction of interest rates, traders will continue to steer sterling in wide ranges.

US$ Falls As Equity Gains Spark Confidence; Bernanke, Paulson Testimony Eyed

The US$ declined overnight across the board overnight ahead of testimony this morning by Fed Chief Ben Bernanke and US Treasury Secretary Hank Paulson. Both of these officials are slated to give testimony at 10:00 a.m. The market will be closely parsing Bernanke’s comments to gauge the extent of further rate cuts from the Fed. Currently Fed Funds futures markets have assigned a 66.0% probability to the prospect that rates are lower by 50 basis points by the March meeting and a 34.0% probability that rates will be 75 basis points lower. This backdrop of lower rates continues to weigh on the US$. In addition, the market will look for further clarification from US Treasury Secretary Paulson concerning a housing market bailout to distressed borrowers. In addition to this testimony, the market is looking to US data that seems to thus far have had little effect. Trade Balance Data posted an improvement to yield a deficit of $58.8 billion vs. expectations of a $61.1 billion deficit reading. In addition, weekly claims registered 347,000 vs. expectations of a 348,000 reading.

The euro gained overnight ahead of testimony from US Fed Chief Bernake and despite the release of worse than expected data in the Eurozone. Interest rate differentials continue to steer the course of trade in the euro, ultimately supporting the common currency. With ECB Chief Trichet signaling his intent to remain “vigilant towards price pressures”, Eurozone interest rates at a minimum will remain steady, if not push higher. This view helped bolster the common currency despite the release of data from the European Union showing that GDP dropped to 0.4% in the fourth quarter from a 0.8% reading the previous quarter. Despite these signs of economic weakness, the euro will continue to gain traction, as interest rates remain the defining factor behind trade.

The yen gained modestly overnight as investors continue to jockey positions around the “carry trade.” With the recent surge in global stock markets, investors have again resumed taking positions using the yen as a financing vehicle. The yen remaining a proxy for the markets’ appetite for risk seems certain to prevail for some time ultimately steering the direction of the Japanese currency.

The pound gained overnight as investors have again refocused on interest rates and the probability that the Bank of England will refrain from further rate cuts in the near future. Yesterday the Bank of England’s Governor Mervyn King asserted that inflation was pushing above the Bank’s 2.0% target, suggesting that rates will remain at current levels. With the market contrasting the Bank of England’s policy position with that of the US Federal reserve, the pound will continue to gain.

US$ Gains Against Yen as Retail Sales Point to Equity Market Rebound

The US$ continues to trade in rather narrowly defined ranges as traders gauge the overall health of the US economy and the scope of further rate cuts from the US Fed. Recent releases of weak housing, employment and manufacturing data within the US have prompted traders to bet with a 74.0% probability that Fed Funds rates drop 50 basis points by the March 18th meeting with a 26.0% chance assigned to the probability of a 75 basis point rate decline. Overall the prospect of lower US rates continues to weigh on the greenback, however, some traders have begun to speculate that there may soon be light at the end of the tunnel and global economy could avoid recession. These views were reinforced by the announcement yesterday by US financier Warren Buffett that he is prepared to bail out some of the bond reinsurers. With Buffet seeing opportunity in this sector, particularly distressed by the fallout from sub prime lending, some traders have begun to speculate that a market bottom is forming. Likely to provide the US$ with a further short-term boost this morning was the release of better than expected retail sales data in the US. Retail Sales rose 0.3% vs. an expected decline of 0.2%. This better than expected data could prove the US consumer more resilient than previous though adding further evidence to the belief that the US economy could avoid recession.

The euro declined modestly this morning following this morning’s release of better than expected US retail sales data. Expect ranges to define trade in the euro for some time, with interest rate expectations being the primary driving force behind trade. Yesterday, better than expected data released in Germany coupled with comments from the German Finance Minister helped anchor Eurozone interest rate expectations. It seems almost certain that the ECB will hold rates steady for some time, helping further the appeal of the euro as traders contrast this position with the Fed who continues to lower rates.

The yen fell overnight following the apparent rebound in global equity markets, as traders again seem poised to adopt more risk. With the yen continuing to act as a proxy for market risk and traders again tepidly reentering the “carry trade,” traders shorted the Japanese currency. Expect this pattern of a direct correlation between the direction of the yen and the health of global equity markets to persist for some time, ultimately relegating the yen to broad trading ranges.

The pound gained overnight after the release of a report by the Bank of England signaling that they were raising their inflation forecast. This hike in inflation expectations has helped stymie the view that the Bank of England could resume rate cuts in the near future. Further adding to evidence that the UK economy remains on track was the release of a report showing that UK jobless rate fell for the 16th straight month and that economic growth remains on track registering quarterly gains of approximately 0.6%. With this relatively strong economic data and mounting inflation pressures, the BOE will likely hold rates steady, keeping sterling well supported against the US$ in the short-term.