The US$ is higher against most major currencies this morning as trade remains thin after the New Years holiday. In the first day of trading of 2009, it appears that market’s focus has again moved to comparative economic strength rather than the risk aversion theme, which has dominated currency markets for the past two months. With the Fed’s target rate having already been effectively slashed to 0%, and with the central bank actively pursuing quantitative policies to keep long term rates lower (the Fed announced earlier this week it will in fact be buying up to $500 billion worth of mortgage backed assets starting as soon as later this month), traders appear to believe that the U.S. may be best set for a recovery sooner rather than later. While the dollar may remain under an amount of pressure in the near term with the currency providing little to no yield at all and with the country’s budget deficit swelling, as global interest rates continue to ease, the dollar will see significant strength as the U.S. economic situation is surprisingly better than its G7 counterparts. Later this morning, investors will take note of ISM Manufacturing data, expected to show further contraction to 35.4, its fastest pace in nearly three decades. In the short term, expect trade to remain range-bound for the day with no clear trends, and ahead of next week’s convening of the new Congressional class and the arrival of President Elect Obama in Washington, D.C.
The EUR is lower this morning after economic data showed the Euro Zone’s recession is deepening. The number of nations using the euro as their currency increased to sixteen over the holiday, with Slovakia being the newest member of the Euro Zone. However, PMI data fell to 33.9 last month, the lowest since records began in 1998, strengthening the argument for lower Euro Zone interest rates despite hawkish rhetoric from some of the ECB’s key members. It appears that Euro Zone growth will be comparatively weak compared to the U.S. in ’09 and the ECB will likely need to lower interest rates closer to 0% before any recovery. In the short term, expect the euro to remain range-bound albeit with a negative bias.
The JPY is weaker against most major currencies this morning as the risk aversion trade, which has benefited the yen as of late, begins to weaken. With the market now focused on comparative economic strength for 2009, the yen has remained under pressure as growth prospects for Asia are particularly grim. It’s anticipated that the Japanese economy shrunk by as much as 12% in the 4th quarter of ’08 as a strong yen and waning global demand weighed heavily on Japanese exports, the base of country’s GDP. With global demand expected to continue its decline for at least the first half of 2009, next exporting countries will remain on the back foot, thus weighing on the yen.
The GBP is weaker this morning as economic reports showed that the British economy is sinking further into recession. U.K. mortgage approvals slid to the lowest level since at least 1999 and British manufacturing contracted for an eighth consecutive month. With all British economic data pointing towards worsening conditions, it is widely expected that the BOE will push rates lower by as much as another 1% (from the already historically low 2%), which would push British rates to their lowest level since the creation of the bank in the mid 1600’s. In the short term, expect the pound to remain relegated to the lower end of its ranges as traders focus on the health of the British economy in ’09 in comparison to that of its G7 counterparts.
