The US$ gained against most major currencies overnight while falling against the JPY. After last Friday’s Payrolls report, which showed that the world’s largest economy shed over 1 million jobs in the final two months of ’08, fear that the world’s largest economies are slipping deeper into recession has bolstered the dollar specifically against European currencies. While the U.S. may be currently worse off than its European counterparts in some regards, U.S. officials have been highly proactive in fighting the recession and have plans to put Americans back to work. While U.S. interest rates sit at .25%, the British and Euro Zone central banks have been more reticent to act, and continue to rely on monetary policy to stimulate the economy. The dollar has however weakened against the yen as the Japanese currency continues to benefit from its status as a “safe haven” instrument. There is no economic data slated for release this Monday, so expect trade to remain choppy ahead of the ECB meeting this Thursday. Tuesday sees the release of the Monthly Budget Statement, the most recent reading of the Trade Balance, Consumer Confidence, and Wednesday sees Import Price Index, and Retail Sales. Thursday sees the release of Produce Price Index, Weekly Jobless Claims, Empire Manufacturing and Philly Fed. The week closes out with CPI, Industrial Production and U. of Michigan Confidence all due out on Friday.
The EUR is weaker against most major currencies this morning as expectations rise for a cut in interest rates from the ECB. Last week, a reading showed that Euro Zone inflation had fallen much faster than expected, to 1.6%, the first time inside the Bank’s target 2% in nearly two years. With inflation having eased considerably, expectations for a deep cut in interest rates from the ECB have risen. While a cut in interest rates generally hurts a country’s currency, a cut may actually benefit the EUR as the market interprets the change in rhetoric as signifying that the ECB is willing to be proactive. Ahead of this Thursday’s meeting, expect the EUR to remain under modest pressure, albeit within its recent ranges.
The JPY is higher this morning as global unemployment data has caused a renewed wave of risk aversion. With companies around the world downgrading their yearly forecasts on a seemingly daily basis, and with the world’s largest economy having reported another steep drop in employment last month, investors have sought the yen’s safe haven status. However, any yen gains may be capped by the systemic economic weakness in the Japanese economy. In the short term, expect the yen to remain supported as global stocks sink and commodity prices decline, thus pushing the commodity-based currencies lower. However, in the medium term, the yen will likely pare its gains as its “safe haven” status dissipates.
The GBP is weaker this morning on continued weakness in the British labor market. U.K. financial services companies may cut as many as 15K jobs in the first few months of the new year amid a plunge in business confidence. To offset the affects of the recent spike in unemployment, British PM, Gordon Brown, pledged 500 million pounds to encourage hiring. However, the governments effort, after a smaller-than-expected cut in interest rates last week from the BOE, have been interpreted as too little and too late. While the pound’s downside potential may be capped by expectations for the U.K. economy to rebound in the second half of the year, expect sterling to remain under pressure in the near term in a renewed wave of risk aversion.
