The US$ is relatively unchanged this morning against most major currencies ahead of this mornings Retail Sales data. Rising unemployment caused consumers to retrench, and retail sales suffered, registering a drop of 3.1%, the six consecutive drop, versus a more modest drop of 1.4% expected. However, a continued decline in retail sales was widely anticipated following grim forecasts from even discount retailers such as Wal-Mart. The dollar has not seen significant declines on this data however, as the market sees it as added support for urgent action from the Obama administration starting the day he takes office. Sales in all major categories declined, led by a 16% drop at gas stations as both oil prices and consumer demand declined in December. Investors also took note of the Import Price Index, registering a decline of –4.2% versus an expected –5.3%, showing that inflationary pressures have abated in the near term. However, the dollars gains have been capped by Fed Chairman Bernanke’s comments yesterday stating that further bank bailouts may be necessary in 2009. While such action could actually benefit the dollar in a renewed wave of risk aversion, any further negative news in the financial sector will surely weigh on the markets perception of the U.S. economy’s overall health. In the short term, expect the dollar to remain relatively well supported against most major currencies as European nations face credit warnings from international ratings agencies.
The EUR is weaker this morning as more Euro Zone nations were warned that their credit rating may be reduced in 2009. S&P threatened Portugal this morning that it’s sovereign debt may be downgraded, coming only a day after similar warnings were issued to Spain, Italy and Ireland earlier this week. Ireland also purportedly admitted it may need IMF assistance should credit conditions or the global economic downturn worsen. As net debt as a percent of GDP swells throughout the Euro Zone, confidence in a European recovery from recession has diminished significantly ahead of tomorrow’s ECB meeting. Interestingly, Germany also lost its status as the world’s third largest economy last year, surpassed now by China. Yesterday, German Chancellor Merkel announced a renewed 100+ billion euro fiscal stimulus plan, which will only weigh further on the German governments ability to finance such programs through government debt auctions. In the short term, expect the EUR to remain under pressure ahead of tomorrow’s ECB meeting.
The JPY consolidated its recent gains overnight as investors remain relatively risk averse. With commodity prices again on the decline, the yen has appreciated against higher-yielding currencies. The yen has also found support as traders liquidate euro positions ahead of tomorrow’s ECB meeting at which the Bank is widely expected to cut interest rates by a minimum of .5%, greatly reducing its yield advantage over the yen. In the short term, expect the yen to remain supported as global earnings forecasts disappoint, sending stock indexes lower.
The GBP is relatively unchanged this morning after the British Prime Minster took further action to stave off a deep recession. Gordon Brown pledged to guarantee 21.3 billion pounds of loans to companies as British leaders have acknowledged the failure of bank bailouts and government spending to contain the recession. The move comes a day after Germany took similar steps, with European governments realizing the dire state of the economy and need to cap unemployment and encourage consumer spending. Spending and tax cuts alone will not be enough to jump start economies as bank writedowns around the globe approach $1 trillion. In the short term, expect the pound to remain range-bound as traders gauge the overall direction of the U.K. economy in 2009.
