FXView

US$ Mixed Ahead of the New Years Holiday

The US$ is mixed this morning as trade remains thin ahead of the New Years holiday.  Economic fundamentals continue to have little affect on the direction of trade.  This morning, weekly jobless claims were released early and better than expected at 492K, versus an expected drop of 575K.  However, continuing claims rose 100K versus expectations, jumping to a 26-year high, showing continued weakness in the labor market.  Today, expect the dollar to remain relatively well supported against most major currencies as traders square up positions in a likely shortened day of trade.

 

The EUR is weaker against the dollar this morning, capping its worst yearly performance against the dollar in three years.  The euro pared its losses from late summer and early fall in the final month of 2008 as the interest rate gap between the Euro Zone and the U.S. widened in the European’s favor.  However, as focus again shifts to comparative economic health, expect the EUR’s recent advance to remain limited with its long-term trend being negative.

 

The JPY is relatively flat this morning against most major currencies.  The yen was the “breakout” performer of 2008, with gains in the double digits against all major currencies.  However, severe economic weakness in Japan keeps the yen in check as GDP is forecasted to fall by as much as 12% in the 4^th quarter ’08.  In the short term, expect the yen to oscillate in its recent ranges ahead of the new year. 

 

The GBP pared some of its weekly losses against the dollar and the euro on no major economic news, but more traders buying the pound due to its historically low price.  However, the BOE is still widely expected to continue lowering rates to close to 0% in the near term, and no significant recovery in the U.K. economy, and thus the pound, is expected until that time.  With global interest rates converging near zero, focus will shift to comparative economic strength and stimulative actions other than monetary policy, and this may benefit the pound in the second half of ’09 as the BOE remains one of the most proactive global central banks. 

US$ Slips as Geopolitical Risk Boosts Demand for Currency-Based and Safe-Haven Currencies

The US$ remained volatile overnight as trade remains thin ahead of the New Year holiday.  The dollar saw support late yesterday afternoon, and into the early evening as the Fed in cooperation with the Treasury Dept. extended GMAC, the financial arm of GM and the largest lender to GM dealerships across the U.S., a $5 billion loan from TARP funds after being approved as a bank holding corporation earlier this week.  This bolstered the dollar as the risk element of the faltering automakers is at least on the back burner for the time being.  However, reversing the dollar’s gains are continued fears over Israel’s declaration of “all-out war” against the Hamas-controlled Gaza Strip.  With an added element of geopolitical tension to the already risk-averse atmosphere, traders have sought safe investments, thus pushing the dollar lower against European and commodity-based currencies (the Swiss franc, Aussie dollar, South African rand, etc.).  This morning sees key economic data including the S&P CaseShiller Home Price, expected to show deeper declines, Chicago PMI, expected to register 33.0, and Consumer Confidence, expected to show a modest improvement as gasoline prices have plummeted over the past month.  In the short term, expect the dollar to remain range-bound as traders are unwilling to take large positions into the new year, however economic data could influence trade as focus again shifts back to the comparative strength of the U.S. economy versus that of its G7 counterparts.

 

The EUR pared its losses from yesterday’s trading session over renewed fears that the Israeli conflict may impede oil supply.  With heightened geopolitical tensions dominating trade, the euro has seen a boost against the dollar.  The common currency also edged closer to parity with the GBP, as the euro continues to benefit from its current yield advantage over the pound and with heightened expectations that the BOE will continue lowering interest rates in the near term.  However, the euro’s upside potential may be capped as expectations grow that even if the ECB holds rates steady at their January meeting, they will still be forced to lower interest rates in the medium term.  This morning German CPI, the most common gauge of inflation, registered far lower than expected, and lower than the ECB’s target rate of 2%.  With the Euro Zone’s largest economy registering low inflation, the potential for lower ECB interest rates has grown.  In the short term, expect the common currency to remain well supported as the Israeli conflict unfolds and traders gauge the overall health of the Euro Zone economy headed into 2009.

 

The JPY remains flat this morning ahead of the new year.  The yen’s role as a “safe haven” asset remains largely in tact, however expectations of dismal GDP data from the 4^th quarter has capped the yen’s appreciation as traders’ attention again focuses on comparative economic strength amongst the G7.  The Japanese economy is expected to shrink by as much as 12.2% in the fourth quarter, the sharpest drop since 1974, as exports have collapsed.  Exports slid an unprecedented 26.7% last month as the yen appreciated rapidly and global demand waned.  Thus, in the short term, expect the yen to remain relegated to tight ranges before the new year.

 

The GBP pared some of its losses from yesterday after hitting a fresh six-year low against the dollar, and an all-time low against the EUR.  While expectations that the BOE will lower interest rates in the near term keep the pound under pressure, there have been an increasing number of bets that ultra-low interest rates and quantitative measures will be stimulative to the British economy.  In the long run this will prove supportive for the pound, and could lead to a modest recovery.  However, in the near term, the continued collapse of U.K. home value, falling 12.2% so far this year from a year ago, will keep sterling under pressure.  In the short term, expect the pound to remain towards the lower end of its ranges ahead of the new year. 

US$ Falls as Geopolitical Fears Boost European and Commodity Currencies

The US$ is broadly weaker this morning against most major currencies as geopolitical tensions have weighed heavily on the dollar.  Israeli air strikes pounded the Hamas-controlled Gaza Strip for a third day in a row, pushing the dollar lower as oil prices recovered on fear that supply may be disrupted.  The greenback also slipped against commodity based currencies, with oil prices on the rebound and gold prices higher as well in a “safe haven” role, and the Swiss franc in a flight to quality and safety.  The dollar has also remained on the back foot this morning ahead of reports this week that are expected to show that the U.S. economy slipped further into recession.  Despite retailers’ best efforts to encourage holiday shoppers to spend, preliminary figures suggest that this holiday season may have been the worst on record.  There is no major economic data slated for release today, but Tuesday sees the release of S&P CaseShiller Home Price Index, Chicago PMI and Consumer Confidence.  Wednesday sees the early release of Weekly Jobless Claims ahead of the New Years holiday.  Friday sees the release of ISM Manufacturing.  With home prices continuing to decline, manufacturing seemingly slowing in all sections of the country, and now added geopolitical risk, expect the dollar to remain under strain in the short term as the risk of holding U.S. dollars currently outweighs the little-to-no yield that the currency offers.

 

The EUR is well supported this morning, having gained significantly against the dollar and inching closer to parity with the GBP.  The common currency has benefited as Israeli air strikes of the Gaza Strip has added a geopolitical element to the risk averse atmosphere that continues to drive trade.  With little to no incentive to hold the US$ with interest rates effectively at 0%, the euro has been buoyed by higher commodity prices and fear that the unrest in the Middle East will spark a recovery in oil prices.  The euro also gained against the GBP on speculation that a deepening economic slump in the U.K. will force the BOE to lower interest rates further.  However, while the euro’s yield advantage continues to drive the common currency higher against its British counterpart, speculation that the ECB is not done lowering interest rates themselves will cap the currency’s gains.  In the short term expect the euro to remain relatively well supported against most major currencies, with volatility remaining high as trade will be thin for most of this week.

 

The JPY gained this morning as Middle East tensions have added to the risk aversion trade.  The yen has benefited as of late as a relatively safe investment as Japanese banks have been largely insulated from the “toxic” assets that have crippled European and American banks.  The added geopolitical risk has only added to the direction of trade.  However, the yen is off its multi-decade high against the dollar as a Japanese economic recession and the threat of central bank intervention should the currency gain too much is likely to cap any significant gains.

 

The GBP is relatively flat against the dollar this morning while touching a new low against the euro.  The pound fell closer to parity with the common currency as a report showed that auto manufacturing slumped some 33 percent last month from a year ago, only highlighting the plight of the British economy.  Despite a significantly weaker pound, waning global demand has hurt British manufacturers.  While traders expect the BOE to continue lowering its interest, most likely as low a 0%, there is building expectations for a sterling recovery as the rate cuts will likely prove stimulative to the U.K. economy.  However, in the short term, expect the pound’s upside potential against the dollar to be capped by its fall against the euro.

The US$ pushed lower within its recent ranges against most major currencies as trade remains thin the day after the Christmas holiday.  Data highlighting the plight of the U.S. economy weighed on the dollar on Wednesday, and has kept the dollar towards the lower end of its ranges.  New claims for unemployment benefits remained near a 26-year high, consumer spending dropped for a fifth straight month, and big-ticket purchases for durable goods dropped 1% last month and the number for October was revised lower to  –8.4%.  In the latest bailout developments, the SEC approved GMAC, GM’s financial arm, as a bank holding corporation, thus making it eligible to receive TARP funds and avoid a potential default.  Any failure of GMAC, which is the largest lender to GM dealership franchises, would have been detrimental to the auto industry despite the $14 billion in loans extended to GM and Chrysler a week ago.  However, with trading staff remaining thin, range-breaking moves are not to be expected in today’s likely shortened trading session. 

 

The EUR moved to the higher end of its recent ranges this morning as trade remains thin after yesterday’s Christmas holiday.  The common currency has remained well supported over the past two weeks due to the currency’s yield advantage with ECB rates remaining relatively high in comparison to its G7 counterparts.  While several members of the ECB monetary policy committee have made it clear that they believe their counterparts have followed the correct path by cutting interest rates, President Trichet and several others have made it clear that the Bank will not pre-commit to any policy stance and that price control remains the Bank’s mandate.  For today, expect the euro to remain supported, albeit within its recent ranges.

 

The JPY is flat this morning, having heading for its first weekly loss against the dollar in over two months.  Japanese inflation slowed and industrial production slumped last month, adding to bets that the BOJ will pursue “quantitative easing”, essentially pumping cash into the economy at a quickened pace and buying long-term debt in order to improve access to funding for companies.  In the short term, expect the yen to remain range-bound against the dollar, however in the medium term, expect modest yen weakness against the greenback as comparative economic strength begins to influence trade more than the flight to safety.

 

The GBP is unchanged this morning as trade remains thin.  With no major economic data due out today, and with many traders remaining on vacation after yesterday’s holiday, the pound has been range-bound, with direction based on expectations for economic growth in the U.K. versus the U.S.  With the BOE widely anticipated to continue lowering its benchmark rate to near 0% in the near future, the pound no longer benefits from its status as a high yielding currency, and thus remains relatively weak against the dollar, and near parity with the euro.  For today, expect trade to remain quiet with trade focusing on British economic growth once normal volumes of trade resume next week.

US$ Flat Despite Rise in Weekly Jobless Claims

The US$ remained flat overnight as trade remains thin ahead of the Christmas holiday.  Despite a mass of economic data released yesterday, and due out this morning, trade has been largely unaffected by economic fundamentals.  Yesterday, a report showed that existing home sales fell to their lowest level in nearly two decades last month as the global credit crunch slowed lending to near historic lows.  Further highlighting the plight of the U.S. economy, weekly jobless claims this morning rose more than expected to 586K, and Durable Goods Orders (specifically on big ticket items such as cars) fell by 1%.  Personal spending, another key indicator of the health of the U.S. economy, registered better than expected at -.6%, and better than last month’s 1% drop. However, with little volume in markets today, economic fundamentals continue to have little effect on the dollar.  While U.S. data remains negative, anticipation that the Fed’s 0% interest rate policy and President Elect Obama’s plans to put nearly 3 million Americans to work in the next two years will pull the U.S. economy out of recession has ultimately buoyed the dollar.  With comparative economic strength between the U.S. and its G7 counterparts again dominating trade, expect the dollar to remain largely unchanged ahead of tomorrow’s holiday.

 

The EUR held steady overnight ahead of tomorrow’s Christmas holiday.  The Euro Zone economic calendar was barren today, but the remaining market participants focused on U.S. durable goods orders and personal spending, both registering a smaller decline than expected, and weekly jobless claims, jumping by 30K more than expected.  However, economic fundamentals seem to have little affect on currency markets this morning as traders remain focused on the comparative strength of the Euro Zone economy and that of its G7 counterparts.  Ahead of markets’ early closing this afternoon, expect the euro to remain relatively flat as investors remain unwilling to assume large positions over the holiday.

 

The JPY gained modestly against most major currencies overnight in a continued, although diminished, “safe haven” trade.  Ahead of the holiday, investors appear to be unwilling to assume any risk, and thus the yen has seen a modest rally.  The yen remains the breakout performer of 2008, having appreciated 59% against the AUD, 66% against the GBP, 30% against the NZD, 25% against the US$, and 35% against the EUR.  In the short term, expect the yen to remain well supported, as the “safe haven” trade has not seen its final hour quite yet.

 

The GBP is flat this morning against the dollar, and reached a new low against the euro overnight, moving ever closer to parity.  A report this morning that U.K. property prices will likely continue to plummet, possibly a further 10%, totaling a near 1/3 collapse from their peak value.  Currently, the pound remains on the back foot against the euro as the common currency’s yield advantage pushes the pound lower.  However, in the long term, the focus of trade should turn towards comparative strength of the G7 economies.  In the short term, expect the pound to remain relatively flat against the dollar ahead of tomorrow’s holiday.

US$ Flat as Many Get an Early Start to the Holidays

The US$ remained largely unchanged overnight, consolidating in its recent ranges as many have already left for the Christmas holiday.  Despite thin trade, the remaining investors took note of the final reading of Q3 GDP, registering -.5%, as expected, with no revision from the previous reading.  While the negative growth shows the dire condition of the U.S. economy, it was widely anticipated and is far better than the expected contraction experienced in the fourth quarter.  While particularly sour economic data continues to weigh on the dollar, negative data was widely anticipated and has not determined the overall direction of trade.  While economic fundamentals in the U.S. remain weak, analysts believe that the country is still best set to recover from the current economic downturn in 2009 as the Fed’s proactive policy stance will prove stimulative to the economy.  Investors also took note of Personal Consumption data, registering –3.8%, versus and expected –3.7%.  Investors will also watch U. of Michigan Confidence data, expected to contract to 58.8, New Home Sale, expected to drop to 415K the lowest level in 17 years, Existing Home Sales, expected to show a modest contraction, Home Price Index, expected to remain unchanged, and Richmond Fed, expected to continue to contract.  In the short term, expect trade to remain thin and the dollar’s direction to remain largely flat ahead of this week’s holiday.

 

The EUR is largely unchanged this morning, as trade remains thin ahead of this week’s holiday.  The euro has remained rather well supported against the dollar as a slew of negative U.S. economic data weighs on the currency.  However, the common currency has been relegated to ranges as many have left early for the Christmas holiday.  This morning showed that the U.S. economy did contract by .5% in the 3^rd quarter, but this reading was widely anticipated and has had little effect on currency markets.  While the euro gained significantly against the dollar last week following the Fed’s move to lower interest rates effectively to 0%, the move was overdone, and driven by profit taking after the US$’s gains since the late summer.  However, economic fundamentals in the Euro Zone also remain weak and the comparative strength of the region does not warrant such a strengthened currency.  In the short term, expect the euro to remain largely unchanged ahead of the Christmas holiday.

 

The JPY is slightly weaker against most major currencies this morning as the global economic downturn is having a significant negative impact on the Japanese economy.  Toyota announced that it has had its worst year since the WWII and that it is considering cutting U.S. employees for the first time ever as global demand wanes.  The yen has also been on the back foot since the BOJ cut interest rates to .2%, in a largely symbolic move that the BOJ will take action to not only help the economy, but also weaken the yen should is strengthen much further.  While trade remains thin ahead of the Christmas holiday, and with the Japanese economy virtually shut down for the next several days with public holidays, expect the yen to remain relatively flat.

 

The GBP is also unchanged this morning against the dollar, and has continued its push towards parity with the EUR.  Speculation that the BOE will cut interest rates at a faster pace than its Euro Zone counterpart has led the pound lower as well.  This morning, a report also showed that the U.K. economy shrank more than anticipated in the third quarter as service industries fell the most in 18 years.  Mortgage approvals also fell to a 14-year low last month as the economic slump discouraged buyers and banks declined to pass on the BOE’s significant reduction in interest rates in the form of lower mortgage rates.  In the short term, ahead of this week’s holiday, expect the pound to remain largely unchanged. 

US$ Mixed Against Most Majors as Trade Remains Thin in Shortened Week

The US$ is mixed this morning, slipping against the EUR and gaining against both the JPY and GBP.  With interest rates and the impact of recession driving trade ahead of this week’s holidays, the dollar has remained on the back foot.  Last week, the White House extended temporary loans to both GM and Chrysler, but many doubt that the lifeline will do much to spur the U.S. economy out of its now year-old recession.  Should the companies manage to restructure their businesses and streamline their brand offerings, global demand for big-ticket items has suffered so severely in the past twelve months, expectations of profitability remains slim.  This however is not to say that the U.S. is the only economy that is suffering.  The U.S.’s G20 counterparts are all feeling the squeeze as the global economy slumps.  Thus, while the economy, and subsequently the dollar, will remain under strain in the near term, with the Fed’s signal that it will take aggressive action to jumpstart the economy, following last week’s cut in interest rates to 0%, investors seem to believe the U.S. economy may still be best set for a recovery in the second half of 2009.  Despite the shortened week, investors will take note of an array of data with the latest reading of GDP, Personal Consumption, U. of Michigan Confidence, New Home Sales, Existing Home Sales, House Price Index, and Richmond Fed all due on Tuesday.  Wednesday sees Personal Spending, Durable Goods Orders and Weekly Jobless Claims ahead of the Christmas holiday on Wednesday.  While trade remains thin ahead of the holiday, expect direction of the dollar to remain volatile.  Expect the dollar to remain range-bound this week as traders gauge the health of the U.S. economy, and chances for a recovery next year, with that of its G7 counterparts.

 

The EUR gained this morning in a volatile overseas session.  With the U.S. Fed moving interest rates effectively to 0% last week, and with the BOE signaling that it will likely continue aggressively lowering British interest rates, the euro experienced broad support late last week as it appears the ECB remains divided on lowering interest rates further.  While ECB President Trichet made it clear last week where he stands on the matter, and that is to not lower rates further until banks resume normal lending at the consumer level, other voting members from the ECB seem to be in disagreement.  Miguel Ordonez stated that the ECB is “likely” to cut rates further next month should inflation drop below the 2% mark, which is forecasted.  However, member Bini Smaghi warned against monetary policy being too lax.  While there is debate, investors appear to believe that the ECB will likely refrain from cutting further in January, thus benefiting the common currency as its yield advantage remains in tact against its G7 counterparts.  Ahead of this week’s holiday, expect trade to remain highly volatile albeit relegated to recent wide ranges.

 

The JPY has retreated from its best levels in fourteen years after the BOJ cut interest rates late last week.  The BOJ lowered rates from .3% to .2%, strongly influenced by the U.S. Fed’s extraordinary action of lowering rates to near 0%.  While the interest rate cut will likely have little real effect on the Japanese economy, the symbolic effect that the BOJ will do what is needed to help the flagging Japanese economy has been embraced as flows to the yen as a “safe haven” continue.  The yen’s recent gains were also tempered as Finance Minister Nakagawa stated late last week that he has the “means” to weaken the yen if necessary and is “closely monitoring” foreign exchange markets.  As trade remains thin this week, expect the yen to remain in its recent ranges as its “safe haven” appeal remains intact for the time being.

 

The GBP is weaker this morning as key BOE members signaled that the Bank is not done lowering interest rates yet.  Further, BOE member Beasley and Deputy BOE Governor Gieve both stated that monetary policy alone will not be enough to help the U.K. economy avoid some of the “worst consequences” of the global credit crunch, thus signaling that the BOE is prepared to follow the U.S. Fed in pursuing other means to effectively lower long-term interest rates.  The pound also remained under weight as Gieve also expressed doubt that the British Treasury will get back all the 37 billion pounds it’s lent to banks.  With the shortened week, expect the pound to remain towards the lower end of its ranges against the dollar, while pushing ever closer towards parity with the EUR as the market prices in lower interest rates in the U.K.

US$ Gains After White House Extends Loan to Automakers

The US$ pared much of its recent losses against the euro as traders took advantage of the dollar’s drastic drop over the past two days.  With trade remaining thin ahead of next week holiday’s, trade continues to be highly volatile.  The dollar’s gain against the euro also comes after the ECB cut the rate at which banks can lend with the central bank by 100 basis points.  The dollar initially fell against all major currencies following this week’s decision by the Fed to cut interest rates effectively to 0%, however overnight the BOJ lowered rates to .1%, and the BOE signaled that it plans to continue easing monetary policy, showing that the U.S. may soon be not alone with 0% interest rates.  Markets this morning are mixed, even as the White House extended $13.4 billion in short-term loans to GM and Chrysler in return for warrants for non-voting stock.  There is no major data due out today, so the direction of the dollar will be ultimately be determined by the White House’s announcement this morning and the overall performance of stocks.  With traders again focused on comparative economic strength of the G7 economies, many seem to believe that in a 0% interest rate environment and with proper fiscal stimulus, the U.S. economy may be better off than its European counterparts, which ultimately boosts the appeal of greenback over the long term.

 

The EUR pared much of its recent gains this morning, but is still set for a weekly gain against both the dollar and the pound.  The EUR slipped by the most in nearly two months against the dollar, after benefiting from its single best gain earlier this week.  After the U.S. Fed lowered interest rates effectively to 0% on Tuesday, the EUR saw significant strengthening as the ECB signaled that rates would be on hold for the time being.  The ECB has already lowered interest rates by 175 basis points over the past several months, and is widely expected to encourage banks to pass these cuts on at the consumer level before easing any further.  The ECB did however cut the rate at which banks can borrow money from the Bank overnight by 100 bps yesterday, sparking the currency’s reversal.  Swings in the common currency have also been widely exaggerated with low liquidity in the market ahead of next week’s holidays.  In the near term, expect the EUR to settle back into more moderate ranges as traders continue to digest the implications of significantly lower interest rates around the globe.

 

The JPY remained relatively flat overnight despite a cut in interest rates.  The BOJ met overnight and reduced rates to .1%, down from its already low .3%.  However, the cut has had little affect on currencies, is seen as largely symbolic following Tuesday’s decision by the Fed to cut rates effectively to 0%.  The yen however remains well supported as many believe even should the BOJ intervene in currency markets to weaken the yen, the actions will have little effect without a coordinated effort between global central banks.  There remains a significant flight to liquid, safe currencies, and any significant intervention that would reverse the direction of the yen, would likely need a coordinated effort from global central banks.  The yen is headed for its 8^th straight weekly gain against the dollar, and the trend is likely to remain in place in the medium term.

 

The GBP remained relatively unchanged against the dollar well paring its losses against the euro overnight.  Prime Minster, Gordon Brown, pledged extra measures to encourage bank lending after the British’s GBP 37 billion has failed to increase credit flows at the consumer level.  In just one example of how credit remains tight, last month, banks approved 32K loans for house purchases, less than a third of the 104K per month average last year.  The pound also pared its losses against the euro as many see the currency’s fall as unsustainable and unwarranted.  While the U.K. economy is in recession, and the BOE is expected to continue lowering interest rates, its not to say that the Euro Zone economy is significantly better off.  In the short term, expect the pound to remain range-bound against the dollar as investors gauge the overall health of the U.K. economy in comparison to that of the U.S.

US$ Remains Under Pressure with 0% Interest Rates

The US$ fell to a two and a half month low against the EUR while paring some of its recent losses against the JPY and GBP.  The dollar remains under significant weight following the Fed’s decision to slash interest rates effectively to 0% this past Tuesday.  With the dollar yielding no returns, flows to the greenback as a “safe haven” investment, have all but evaporated.  With the Fed now out of monetary policy ammunition, the central bank is likely to pursue quantitative methods to keep long-term interest rates at historic lows by boosting liquidity and buying an array of government debt instruments, which should encourage lenders to lower mortgage rates, credit card rates, etc.  However, the plan will likely only be successful should the economy pick up pace.  Having been in the midst of a recession now for an entire year and with unemployment steadily gaining, President Elect Obama has proposed a fiscal stimulus plan with the attempt of putting Americans to work on infrastructure projects.  However, the price tag on Obama’s plan has swelled by some estimates to over $1 trillion, and on top of the governments 23 already preexisting “bailout” plans, the country continues to slip further into debt.  With the U.S.’s budget deficit continuing to grow, the dollar is likely to remain under pressure in the near term.  Traders will also take note of Philly Fed. data, expected to show the largest contraction in 18 years, and Leading indicators, expected to show a modest increase from last month at -.4%, both due out at 10:00 AM.  In the short term, expect the dollar to remain under pressure against the EUR and moderate its fall against the JPY and GBP as traders adjust to a 0% interest rate environment and the implications for the U.S. economy in the long term.

 

The EUR continued its ascent against both the US$ and reached fresh all time highs against the GBP.  The EUR has already gained nearly 20% against the dollar this month so far, erasing its annual decline against the greenback.  With Euro Zone interest rates widely expected to remain above 2%, the EUR’s yield advantage appears to be solidified as the U.S. slashed rates to near 0% and the U.K. is expected to follow suit in the early part of 2009.  While economic data continues to be disappoint in the Euro Zone, this morning with IFO Survey hitting a record low of 82.6, signaling that exporters continue to be hurt by waning global demand, and the German auto industry is under stress as 1 in 7 jobs in the Euro Zone’s largest economy are auto-related.  However, Euro Zone unemployment has held relatively steady, and has given the ECB’s reluctance to reduce rates credence.  However, should the labor market stumble as significantly as it has in the U.K. and U.S., the ECB may be forced to lower interest rates further.  In the short term, expect the EUR to remain well supported against most major currencies as the common currency’s yield advantage remains intact. 

 

The JPY weakened as the BOJ signaled that it may move to weaken the currency.  Finance Minister Nakagawa said he has “the means” to limit the yen’s ascent, which has weighed heavily on the Japanese export-driven economy as Japanese goods become more expensive for overseas customers.  While the Japanese officials are “keenly watching” the yen’s advance, the currency has gained some 21% against the dollar this year so far, marking its best performing year since 1987.  In the short term, expect the yen to remain well supported, albeit with its upside potential limited by threatened central bank intervention.

 

The GBP pushed lower this morning as the pound approached parity with the EUR.  The pound saw recent strength against the US$ as the U.S. Fed slashed interest rates to a record low of 0%.  However, British officials have made it clear that the BOE plans to continue easing monetary policy, and may very well end up at 0% as well.  With home price plummeting, unemployment worsening, and banks refusing to pass on interest rate cuts at the consumer level, the British economy is in a similar situation that of the U.S.  the pound has also pushed lower this morning after a report showed that the U.S.’s budget deficit swelled to a record last month as tax revenue declined in the midst of the worsening recession.  Mortgage lending has also fallen some 50% from this time last year, and jobless claims have accelerated at the fastest pace since 1991, highlighting the plight of the British economy and its banks’ unwillingness to lend despite lower interest rates.  In the short term, expect the pound to remain under pressure against most major currencies, while remaining range-bound against the US$ as British interest currently remain higher than those in the U.S.

US$ Falls on Agressive Fed Cut

The US$ remains significantly weaker this morning after the Fed took aggressive action.  The Fed lowered interest rates to their lowest levels in history, and in an unprecedented move, to a range between 0% and 0.25%.  The move effectively moves interest rates to 0%, and signaled that the Fed plans to use its “second arrow in the quiver”, the provision of liquidity.  By printing more money, and buying long-term government debt instruments, the U.S. economy is set for a long period of low-to-no interest rates.  This has put significant selling pressure on the greenback as the argument behind holding dollars is far from convincing.  Although interbank lending rates have fallen considerably from their all-time highs reached after Lehman Bros.’ collapse, banks remain hesitant to lend at the consumer level.  The Fed’s thought is that with a flood of dollars, the banks will be incentivised to lend, and that by buying long term government debt and an array of assets, mortgage rates and interest rates at the consumer level will adjust lower as well.  The thought is that with the effects of the Fed’s aggressive campaign to cut rates finally passed on to the consumer, the root of the economic downturn will be addressed and growth will ensue.  However, with investors needing to pay a premium to buy treasury bills, with yields below 0, it remains to be seen how long demand for U.S. debt lasts.  With any dollar yield advantage all but gone, the greenback will remain under pressure in the short term.  Expect trade in the dollar to remain highly volatile as traders digest the Fed’s ultra aggressive action, and the implications for the U.S. economy when entering 2009.

 

The EUR consolidated in its new elevated ranges following yesterday’s drastic cut in interest rates by the U.S. Fed.  The Fed effectively reduced rates to 0% for the first time in history, as the central bank will now lean on quantitative efforts rather than monetary policy.  This comes in contrast to the ECB, with ECB President Trichet stating earlier this week that the Bank is likely done cutting interest rates, at least for the time being.  This highlights the fundamental difference between the two central banks, the Fed has moved aggressively, hoping their actions will spur lending and subsequent growth, whereas the ECB has moved more cautiously and looks to take a larger role in enforcing European banks to increase consumer-level lending before cutting any further.  The ECB does however remain focused on price stability, yet with inflation expected to moderate in the near term, it remains to be seen what the ECB will do.  In the short term, expect the EUR to remain bolstered, simply supported by the euro’s yield advantage over the dollar and other G7 economies’ currencies.

 

The JPY gained to a fresh fourteen year high against the US$ as U.S. interest rates are now lower than that of Japan.  In an unprecedented move the Fed cut rates to a range of 0% - .25%, lower than Japan’s .3%.  However, the BOJ meets this Thursday and Friday, and analysts now suspect that the Fed’s move may force the BOJ to lower rates as well.  However, Japan is the only major economy to have experienced 0% interest rates in modern history, and the experience was not positive, and Japanese growth languished for almost 5 years in the middle of this decade.  As the yen has moved higher, traders’ speculation that a BOJ intervention in foreign exchange markets may be imminent has slowed the yen’s ascent, yet its gains continue to hold.  Thus in the short term, expect the yen to remain well supported as it remains the sole currency benefactor from the “risk aversion” trade.

 

The GBP pared much of its post-Fed gains from yesterday after a report showed worsening conditions for the British economy.  U.K. unemployment claims jumped by the most since 1991 and the unemployment rate pushed higher to 6%, up from 4% only six months ago, and its highest level in nearly a decade.  The pound was also weighed down by the minutes from the BOE’s last meeting at which all 9 members of the monetary policy committee voted for a 1% cut in interest rates to the current 2%.  Investors are currently anticipating the BOE to continue reducing their key-lending rate, most likely by a further .5% in January, and .5% in February.  Thus, while the Fed’s move to reduce rates to 0% is drastic, British rates are anticipated to drop to extremely low levels as well.  This has also weighed on the pound against the EUR as the pair moves ever closer to parity.  In the short term, expect the pound to remain in its recent ranges as investors gauge the relative strength of the U.K. economy in comparison to its G7 counterparts.