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US$ Gains in Renewed Wave of Risk Aversion as GDP Plummets 6.

The US$ rallied sharply this morning against most major currencies, but fell lower against the JPY in a renewed wave of risk aversion.  Global stocks tumbled overnight, led lower by the British banking sector after Llyods Banking Group announced a yearly loss of over 10 billion pounds for 2008.  Markets have also come under pressure this morning as Q4 ’08 GDP was revised lower to –6.2%, down from the initial reading of –3.8%, and nearly a percent lower than the anticipated revision in the worst performance since 1982.  The number highlights the fact that the world’s largest economy is contracting at a faster pace than many anticipated.  This has bolstered the greenback this morning as risk aversion dominates trade.  As it is clear that greater global economy is deep in recession, the dollar will continue to benefit in its role as a “safe haven” investment.  The U.S. government also moved one step closer to nationalizing Citibank, converting up to $25 billion of preferred shares into common stock, reducing existing shareholders’ stake in the company by 74%.  With the Citibank news, and the GDP data surely weighing on the stock market today, the dollar will likely remain bolstered against most major currencies.  Traders will also take note of Chicago PMI data, due out at 9:45 and expected to show a modest decline from last month, and U. of Michigan Confidence due out at 10:00, expected to register 56.0, down 0.2 from last month. 

 

The EUR is lower this morning as investors remain risk averse.  With global banking sector under renewed stress this morning following a reported 10.2 billion pound loss from Lloyds and the effective nationalization of Citigroup by the U.S. government.  The correlation between lower stocks and a lower euro remains largely intact, and the common currency has thus been under pressure.  Currency markets shrugged off a coordinated pledge from the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank to provide Eastern Europe with 25 billion euros in emergency aid.  Elsewhere, the SEK fell to the lowest levels since 2002 as the country’s Q4 ’08 GDP fell by 2.4%, twice what economist were expecting.  In the short term, expect the EUR to remain under pressure as U.S. equities are set to open lower this morning, testing the 7000 level on the DOW, thus driving risk aversion.

 

The JPY is higher this morning in a renewed bid of risk aversion.  While the yen has largely lost its “safe haven” appeal against the US$ after Japanese GDP contracted by 12% last year, its role has been maintained against most European and other Asian currencies.  However, as global equities come under renewed pressure, the yen’s recent losses against those currencies have been reversed.  This has pushed the yen a bit higher against the dollar, albeit still near a three-month low.  In the short term, expect the yen to pare some of its recent losses against the dollar as risk aversion drives trade.

 

The GBP is lower this morning against most major currencies as risk aversion directs trade.  Lloyds Banking Group reported a 2008 loss in excess of 10 billion pounds, and the bank said that it has not reached an agreement on a government asset insurance program which had seen bank shares rise earlier this week.  A separate report also showed that 40% of British mortgage holders may see their loans exceed the value of their homes by year-end.  This comes just days after known dove, BOE member Blanchflower, stated that the U.K. recession will most likely deepen “significantly” this year as consumer confidence remained near a three-decade low.  In the short term, expect the pound to remain towards the lower end of its ranges as global equity markets push lower, thus spurring on risk aversion.

US$ Remains in Ranges as Jobless Claims Hit all Time High

The US$ pushed lower against both the EUR and GBP, while continuing to gain against the JPY.  Global stock indexes pushed higher as the British government announced a plan to insure under-performing bank assets, which has let investors let out a sigh of relief, at least for the time being.  This also comes as the U.S. government will purportedly meet with Citibank executives today to discuss a possible increase in the government’s share of the embattled banking group.  The dollar has thus come under pressure this morning as the recent bout of risk aversion wanes.  The Obama administration also presents its 2009 budget to Congress this morning, which has at least another $750 billion set aside for further bank bailouts.  This has had mixed affects on the dollar, as one hand the mere possibility of further bank failures bolsters the dollar in its safe haven role, but at the same time, the fundamental weakness of the U.S. economy weighs on the currency.  To this point, weekly jobless claims this morning registered a new single-week worst of 667K, versus an expected 625K.  Durable goods orders also registered a steeper-than-expected decline of –5.2%, versus an anticipated drop of two and a half percent.  The unprecedented sixth month of declines has come as credit remains tight and business are unwilling to buy big-ticket items.  Companies, such as GM, have felt the pain more so than others.  The troubled automaker is expected to ask for a further $16 billion in government aid as early as the end of this week.  In the short term however, economic fundamentals will have a muted affect on the dollar, with trade remaining directed by the performance of global stock indexes.

 

The EUR pushed higher this morning despite awful economic data.  Euro Zone economic optimism fell to new all time low overnight, as the regions first recession shows signs of worsening.  Separate reports also showed that lending to consumers and businesses slowed the most in five years, retail sales declined and German unemployment rose for the fourth consecutive month.  The euro however pared some of its recent losses and shrugged off the poor economic data, gaining as European stocks rose for the first session in five.  However, the gains were capped by remarks from former Bundesbank president, Karl Otto Pohl, a fiscal conservative and supporter of the common currency.  He sees serious risk for the euro, as he predicts one of the periphery economies within the Euro Zone will default on their sovereign debt, most likely Greece or Ireland, which may cause the EUR to nearly halve in value as the spread between the value of German or French and Irish or Greek debt increases.  To this point, ECB President Trichet said this morning in a speech that Ireland faces “difficult” decisions, and its road to recovery will be tumultuous at best.  However, despite the doomsayers, the euro will likely remain supported within its recent ranges in the near term as trade tracks the performance of global stock indexes.

 

The JPY is lower this morning as a complete lack of confidence in the Japanese economy continues to weigh on its currency.  S&P downgraded their yearly estimate for Japanese economic growth, predicting that the world’s second largest economy will shrink by 4%.  The yen also fell to a three-month low against the dollar ahead of reports tomorrow that may show rising Japanese unemployment and falling consumer prices.  The JPY is headed for its worst month against the dollar in thirteen years as the country’s recession deepens.  However, losses will likely be capped in the medium term ahead of the end of the fiscal year in Japan (the end of March), as Japanese companies tend to repatriate funds.  In the meantime, the yen will likely remain in its ranges against the dollar, albeit with a negative bias.

 

The GBP is higher this morning as Chancellor Alistair Darling moved one step closer to nationalization of British banks.  The British Treasury will increase its stake in the Royal Bank of Scotland to 84% in return for guaranteeing 325 billion pounds worth of “toxic” assets.  Llyods will also be tapping into this program.  Prime Minister Brown’s government is upset with banks that they have been rationing lending at the consumer level despite the BOE having taken aggressive action to ease monetary policy.  However, political opposition is on the rise with a spokesman for the conservative party being quoted as saying, “the British taxpayer is insuring the car after it has crashed…It’s like saying, ‘lend me a tenner and I’ll buy you a pint.’”  However, in the short term, the pound will likely remain supported in its recent ranges as trade continues to track the performance of stocks.

US$ Remains Flat as both Bernanke and Obama Assuage Some Investor Apprehensions

The US$ is relatively flat this morning despite rather volatile overnight trading.  Yesterday, Fed Chairman Bernanke encouraged markets by essentially ruling out bank nationalization as a possible step, despite the government moving forward with upping its stake in Citigroup to near 40%.  Overseas markets were also encouraged by President Obama’s speech last night at which his message was far more hopeful than as of late.  The President focused on not only the fiscal stimulus bill and bank bailout plans, but also his administration’s agenda for energy, healthcare, and job creation; all vital pieces of the puzzle in rebuilding the U.S. economy.  However, the modest optimism may fade quickly this morning as economic fundamentals remain weak.  Yesterday, Consumer Confidence registered far below what was expected, marking it the worst reading ever.  No recovery in the economy will come until confidence is restored.  With the greater global economy suffering through the worst economic downturn in the post WWII era, any stabilizing in confidence would be seen as progress, but with investor services downgrading the ratings of nations’ sovereign debt on a daily basis, this remains difficult.  This morning, investors will take note of Existing Home Sales, expected to register a modest rise over last month at 4.79 million, and a 1.1% increase month over month.  However, focus will remain on the performance of global stock indexes in the short term.  With U.S. futures pointing to a lower opening on Wall St. the dollar will likely remain supported against most major currencies as its role as a “safe haven” is not over.

 

The EUR is a bit lower this morning as economic fundamentals remain particularly weak.  German GDP for Q4 ’08 slipped to –2.4%, the worst contraction in decades, suggesting that the Euro Zone’s first recession is worsening.  This news came just a day after the news out of Eastern Europe took a turn for the worse.  Ukraine’s sovereign debt was lowered two grades and Latvia’s debt was downgraded to “junk”.  While Latvia, and similar economies, are obviously not major players on the international level, several key Western European economies are heavily invested in Eastern Europe and risk significant write downs do the regions underperformance.  The euro also remained under pressure as ECB member Axel Weber said that money markets remain “tense” despite a reduction in volatility.  In the short term, expect the yen to remain range-bound as global stock indexes remain near decade-lows. 

 

The JPY remains near its twelve-week lows this morning against the US$ as investors continue to shun the Japanese currency.  The yen has fallen out of investors’ favor this week as particularly week economic data has weighed heavily on the currency.  A report overnight showed that Japanese exports, the economic engine of the nation, were halved last month from a year earlier as global demand dries up.  With companies like Sony, Toyota and Honda dipping into the red for the first time in decades, investors have shunned the yen as the immediate economic future of Japan is bleak at best.  Thus in the short term, expect the yen to remain under pressure.

 

The GBP is lower this morning as the U.K.’s economic underperformance continues to weigh on the pound.  European Union officials released a report showing that they are concerned that the GBP’s slide could destabilize the British economy.  It “raises questions about the financial stability of the British economy,” the report said, “and it is a source of concern for the Euro area.”  The report underlines concerns of Euro Zone policy makers that the pound’s slump could weigh on exports to its largest trading partner.  The report was written actually prior to the G7 meeting earlier this month, as a primer for expected discussion on foreign currency, but that never amounted.  British officials also announced yesterday that it is considering full nationalization for its banks, at least for a period, to reduce volatility and ensure their profitability going forward.  In the short term, expect the pound to remain range-bound, albeit with a negative bias as there is little in terms of economic fundamentals to support the currency.

US$ Gains on the JPY as its "Safe Haven" Status Erodes

The US$ remained relatively flat overnight against most major currencies while gaining against the JPY.  It appears the strict correlation between the performance of the stock market and the direction of the dollar is relaxing.  Yesterday, the Dow fell by 250 points, to its lowest closing since 1997 as the U.S. economy continues to erode.  This most recent drop was do largely in part to pervasive rumors that the U.S. government is considering upping its stake in Citigroup to 40% as the banking giant struggles.  Rumors also emerged that AIG will seek further capital from the government, despite having already received $150 billion.  This evening, President Obama gives an address to both chambers of Congress, at which many hope he will instill confidence in markets by revealing details of the government’s bank bailout plan while also outlining the other issues on his domestic agenda.  This morning, investors will take note of S&P CaseSchiller Home Price Index, Consumer Confidence, Home Price Index and the Richmond Fed Manufacturing Index, all expected at or near their worst levels ever.  The market will also pay attention to Fed Chairman Bernanke’s semi-annual testimony before Congress at which he is expected to give an update on the state of the economy as well as the effects that the Fed’s monetary policy has had.  In the meantime, the dollar is on hold against most major currencies as the market awaits any details regarding the government’s plans to boost the economy.  However, should stocks suffer another deep sell off, pushing the market indexes further into the red, expect the dollar to gain in a flight to safety.

 

The EUR is relatively flat this morning as investors remain on the sidelines, unwilling to take any substantial positions as global stock indexes plummet.  The EUR remained rather well supported, despite a drop in German business confidence to its lowest reading in 26 years.  The news comes a week after the German government pledged to double the fiscal stimulus to about 80 billion euros, and the ECB signaled that it will continue cutting interest rates at its meeting in March.  The common currency has also remained steady despite a steep sell off in global equities, pushing indexes to near-decade lows.  As of late, the euro has suffered in times of volatility in the stock market, so to see the EUR remain in relatively tight ranges suggests that the correlation may be weakening.  Thus expect the EUR to remain within its relatively tight ranges, albeit with a negative long-term bias.

 

The JPY is significantly lower this morning as investors sell the Japanese currency en masse.  Over the past six months, the yen has appreciated as it benefited from its “safe haven” role.  Investors also remain wary that the Japanese government has done enough to stem the nation’s worst recession in the post-war era.  In the face of the currency rout, the Japanese Finance Minister announced this morning that the government was considering buying stocks to boost the Nikkei.  The Japanese stock index responded with a three-digit sell off.  Thus, in the short term, expect the yen to weaken as pessimistic economic news out of Japan will weigh on the currency.

 

The GBP remained relatively flat overnight despite awful economic data.  Mortgage approvals in the U.K. fell last month by 43% from a year earlier, in the steepest drop in recent records.  A separate report showed that home prices fell 17.2% from last year.  The government however, did announce plans to unveil a series of measures this week aimed at reviving the mortgage maket, including ordering Northern Rock, a nationalized lender, to expand lending by 14 billion pounds.  The British government has made it clear over the past few months that if necessary, it will force banks that have accepted government capital to lend, and it appears they are holding true to their word.  In the short term, expect the pound to remain bound in tight ranges as traders gauge the effectiveness of the British government’s actions. 

US$ Slips as Stocks Struggle Higher and Bank Nationalization is Eyed

The US$ is weaker this morning on rumors of bank nationalization.  The U.S. government has repeatedly stated that private control of banks is preferable, but that if needed the Treasury will step in.  Rumors are that the government will up its current stake in embattled Citigroup to 40%.  While this has boosted investor confidence, as it provides a vital backstop to the ailing American financial institutions, the mere fact that nationalization is on the table has some traders feeling a bit apprehensive about the long-term outlook for the U.S. economy.  Coming a week after President Obama effectively spent over $1 trillion in a fiscal stimulus plan and a plan to back faltering mortgages, the dollar has weakened against its European counterparts as the U.S. deficit balloons towards unprecedented levels.  The dollar did loose a bit of its appeal as a safe haven investment this morning as stock futures point higher on the Citigroup rumors.  However, its downside remains capped by the comparative economic strength of the U.S. and its G7 counterparts.  It still appears that the U.S. may be best set for an economic recovery late this year as its European and Asian counterparts grapple with dwindling global demand and particularly weak economic performance.  The dollar’s gains last week were also capped by rumors that the Treasury would provide more specific details on its bank bailout plan sometime this week.  Today sees little economic data, with only Dallas Fed Manufacturing data due out at 10:30, expect to register a decline of 52.5%, highlighting the continued slowdown in the U.S. economy.  Tomorrow sees the release of S&P CaseSchiller Home Prices, Consumer Confidence, Home Price Index, and Richmond Fed Manufacturing Index.  Fed Chairman Bernanke will also be testifying in front of Congress on Tuesday to give an update on the economy and Fed policy.  Wednesday sees the release of Existing Home Sales and Thursday sees Durable Goods Orders, Weekly Jobless Claims, and New Home Sales.  The week closes with the most recent reading of Q4 ’08 GDP, expected to be revised lower to –5.4%, Personal Consumption, Chicago PMI, and U. of Michigan Confidence.  With none of these reports expected to show an improvement over the last reading, trade this week will most likely continue to track the performance of global stock indexes and any news regarding the Treasury’s revamped bank bailout plan.

 

The EUR is relatively flat this morning against the dollar after paring its recent losses in later Friday trading.  The common currency had been under weight as of late in a renewed wave of risk aversion as financial institutions stock prices plummeted to new all-time lows, most notably Citigroup and Bank of America, both dropping over 30% in one day.  However, a plan to back stop ailing appears set to be unveiled this week in the U.S., removing some of that risk pressure on the euro.  The common currency also saw a jolt late last week as investors interpreted comments out of Germany that they are considering “bailing out” EU member states whose economies are struggling, as a positive for the currency.  However, the comments were merely that, and no concrete plans have been announced.  In fact, German officials have denied the comments as false, and said that while they do support bolstering faltering member states, it would not be unilaterally, but rather through an IMF fund.  The underperformance of Eastern Europe will continue to weigh on the EUR and the Euro Zone economy as a whole, as most notably seen this weekend at a summit of European G20 nations that failed to amount to any concrete resolutions on the major countries assisting the more periphery economies.  In the short term, expect the euro to remain towards the higher end of its ranges as stocks push a bit higher, but the downside should prevail as the Euro Zone’s economic weakness will ultimately weigh on the currency.

 

The JPY is lower this morning as its safe haven bid wanes.  The yen does remain relatively strong against more currencies as it maintains its reputation as a relatively safe investment.  However, with excessively weak economic performance in the world’s second largest economy, and with stock set to recover some of last week’s losses this morning, the yen has lost its appeal and will likely remain under pressure in the short term.

 

The GBP is stronger this morning, bolstered by continued support in the banking sector from the U.K. government.  It appears that PM Gordon Brown is set to announce a plan for the British government to insure banks against losses on their assets later this week, which may bolster the GBP temporarily.  The pound has also gained as it appears British banks are stepping up efforts to reduce losses.  Royal Bank of Scottland, which the government holds a 40% stake of, plans to cut costs by more than 1 billion pounds as it face continued write downs of under performing assets.  Rumors are that RBS will split its itself into two units and will significantly scale back its investment banking sector.  In the short term, expect the pound to remain relatively well supported, albeit within its recent ranges, but in the medium term, the downside will prevail as economic weakness weighs on the pound, and British officials support a depreciated currency to hopefully boost the competitiveness of its exports. 

US$ Gains as Lower Stocks Spur on Risk Aversion

The US$ pared its losses from yesterday afternoon in a renewed wave of risk aversion.  Global stock markets continued their descent this morning, following Wall St.’s lead after dropping to a six-year low, lower than the levels seen after the collapse of Lehman Bros.  With futures pointing to a sharply lower opening on Wall St., the dollar has benefited in a flight to safety.  Much of yesterday’s losses against the euro can be attributed to rumors that the German government would consider backing struggling Euro Zone economies, providing a backstop for the region and thus reducing the threat of a breakup of the union.  However, these too are mere rumors, and fundamentally the U.S. economy remains stronger, more robust and better set for recovery than its European counterparts.  With the U.S. administration remaining proactive in facing what may end up being the worst recession in the post-war era, the dollar will continue to benefit.  This morning, traders took note of CPI, which rose for the first time in six months.  The rise can be attributed to a modest recovery in gas prices and retailers attempting to push through new year price increases despite record low sales.  The number in most likelihood is an anomaly, most clearly outline by several key Fed policy makers, who over the past several days have warned of deflation, rather than inflation.  Stocks will also remain under pressure this morning as calls for nationalization of both Citibank and Bank of America strengthen, just days after former Fed Chairman Greenspan advocated for such action.  With no further data due out today, expect the dollar to remain bolstered against most major currencies as risk aversion drives trade.

 

The EUR is lower this morning after European shares fell to a six-year low.  Euro Zone manufacturing and services crashed to new all-time lows last month as demand for European products have all but disappeared.  The EUR however was bolstered earlier this week on rumors that the German Finance Ministry was considering financial assistance for the newest members of the Euro block, mostly in hard-hit Eastern Europe.  The ministry however later denied this, and Chancellor Merkel said that Europe’s largest economy stood ready to help Eastern Europe, but principally through the IMF, and not through admission of new member states into the Euro Zone.  Thus with the common currency’s gains having been largely based on rumor and not on fundamentals, the currency has come under renewed pressure as global stock indexes decline.  In the short term, expect the euro to remain under pressure and push back towards the lower end of its ranges.

 

The JPY is lower this morning against the dollar, but higher against most other major currencies as risk aversion gains.  The yen generally benefits as global stock indexes slide, however its favor has been lost against the dollar as Japanese GDP plummeted by 13% in Q4 ’08.  The Japanese economy is expected to continue to under perform this year as corporate losses continue to mount.  The yen remains attractive in times of financial turmoil as the country’s relatively large current-account surplus reduces the country’s reliance on overseas lenders.  However, with global demand for Japanese exports drying up, the country’s surplus has also seen a sharp decline, thus reducing the currency’s luster.  In the short term, expect the yen to remain towards the lower end of its ranges against the dollar as fundamentals continue to drag it down. 

 

The GBP pushed lower overnight after a BOE policymaker said that the country’s recession could end up being a “decade long.”  The pound was also weighed down as British equities slumped more than 6% this week and European shares fell to a five-year low.  John Gieve, the Deputy Governor of the BOE, stated that the U.K. faces a situation similar to that of Japan in the 90’s, a period often referred to as a “lost decade”, as the nation faces depression.  Gieve was quoted as saying, “it’s a serious risk but we are addressing it.  There’s a huge amount policy easing in the pipeline.”  To this point, he is correct.  A report showed that banks repossessed over 40K properties in ’08, a 54% increase from ’07, thus discouraging banks from passing on the BOE’s interest rate cuts in the form of lower mortgage rates.  In the near term, expect the pound to remain under pressure, albeit bound to its ranges as stocks continue their slide. 

US$ Looses Safe Haven Appeal as U.S. Government Set to "Bailout" Home Owners

The US$ is lower this morning against most major currencies, paring much of its gains from the past two days.  The dollar benefited from a flight to quality earlier this week as stocks struggled near a three-month low.  However, equities are set to open higher this morning as the market positively interprets the Obama administrations $275 billion plan to “bailout” struggling homeowners.  The plan sets aside $200 billion dollars in backing for Freddie Mac and Fannie Mae, through which as many as five million home-owners with little equity in their homes, or even owe more on the mortgage than their home is worth, can refinance their mortgages through.  The additional $75 billion will be to encourage lenders to modify loan terms for people at risk of foreclosure, with the goal being monthly payments of under 31% of the owner’s income.  A cash incentive for borrowers who remain current on their loan payments will encourage consistent payments.  However, refinancing may be difficult for homeowners with mortgages held with lenders other than Fannie and Freddie, meaning the plan may have limited affect in hard-hit Florida, California and Arizona, as Fannie and Freddie’s presence is limited.  Investors also remain wary of the plan as restructuring loan terms is easier said than done for loans that have been bundled into securities.  However, the administrations continued commitment to face the root of the recession head on, keeps investors positive that the U.S. economy is set for a slow recovery over the course of the year.  Yesterday, the Fed released its minutes from their last meeting as well as a downward revision for the economy this year.  Originally, the FOMC had predicted that GDP for 2009 would register between –0.5 and 1%, however the forecast now stands at –0.5 and –1.5%, and unemployment figures have been revised upwards close to 9% for the year.  Also in a first, the Fed has announced a target inflation rate of 2%, however over the course of the year the goal will not be to contain inflation to that mark, but rather encourage inflation to that point and avoid deflation as prices of consumer goods continue to plummet.  With stocks expected to open positive this morning, anticipate the dollar remaining under pressure for the course of the day as risk aversion wanes.

 

The EUR pared much of its recent losses overnight as risk aversion waned.  Global stock indexes gained overnight following the release of a U.S. plan to “bailout” embattled homeowners.  The common currency also saw a boost on speculation that the German government would “show its ability to act” as some of its Euro Zone cohorts struggle with the global economic downturn.  German Chancellor Merkel’s cabinet approved legislation yesterday that will pave the way for the nationalization of Hypo Real Estate, in the country’s first government take over of a bank since the 1930’s.  With the major economies in Europe beginning to show that they will support their more periphery counterparts, an element of economic and political stability will likely provide modest support for the euro in the near term.

 

The JPY is weaker this morning as its role as a safe haven investment wanes.  The yen remains under pressure as the world’s second largest economy continues to vastly under perform, eroding its status as safe investment.  The yen also came under pressure as global stock indexes pushed higher as sentiment is positive over a U.S. government “bailout” of the homeowner in the form of mortgage assistance.  In the short term, expect the yen to remain under pressure as stocks edge higher.

 

The GBP recouped much of its recent losses against the dollar as demand for British assets rises as prices near record lows.  With the decline of the pound over the past several months, all things British are relatively cheap.  However, the boost for the pound will likely only be temporary because global consumer demand remains historically low.  Britain’s budget surplus in January also shrunk to 3.3 billion pounds, the smallest for the month in nearly two decades as bank profits decline and tax receipts diminish.  The surplus, normal for a month when 10% of the governments annual tax revenue is collected, compares with 14 billion pounds a year earlier and an estimated reading of 7 billion pounds.  Expect the pound to remain supported throughout the day as stock indexes push higher, however its gains will ultimately be capped by continued economic weakness.  

US$ Gains Across the Board as Stocks Fall

The US$ is stronger across the board this morning as investors opt to hold dollars in face of a recent wave of risk aversion.  Global stock indexes pushed lower overnight as fears over a new round of bank write downs weighs on the prospective performance of financial institutions.  While the problem is obviously global in nature, the dollar has been supported in its role as a safe haven investment.  With the Obama administration moving swiftly to stimulate the failing economy, investors have been reassured that the U.S. is still best set to recover from its current recession later this year.  President Obama is set to sign the much-debated fiscal stimulus plan into law after it narrowly passed through the House and Senate with only three Republican Senators voting for the measure.  Later this week, a plan to help reduce accelerating foreclosures is expected from the Obama Administration as the White House looks to address the lingering cause of the current economic malaise.  The dollar has also found renewed attraction as the larger European economy, including developing Eastern Europe, deteriorates at a quickened pace.  The G7 meeting this past weekend had little affect on currencies as the finance ministers from the world’s largest economies failed to directly address currency markets in the meeting’s communiqué.  This morning, stocks are expected to fall as Wall St. kicks off the week after a long weekend.  Investors also took note of Empire Manufacturing, which declined at far quicker pace than expected to –34.65, versus an anticipated –23.75, the worst reading on record.  Wednesday sees Import Price Index, Housing Starts, Building Permits, Industrial Production and the minutes from the Fed’s February meeting.  Thursday sees Producer Price Index, Weekly Jobless Claims, and Philly Fed.  The short week closes out with CPI data on Friday.  In the short term, expect the dollar to remain supported and push back towards the better end of its recent ranges, as the U.S. economic outlook remains better than its G7 counterparts.

 

The EUR is lower this morning as Eastern Europe’s economic underperformance weighs on the Euro Zone.  Despite a common currency, the Euro Zone remains a group of diverse countries and economies, most notably seen as the difference between government bond yields widens between member nations.  Yesterday, Moody’s stated that the recession in emerging Europe will likely be longer and deeper than elsewhere, which will put ratings of local banks and their Western European parents under pressure.  Expectations of an increase in bad debt, the rise in bank borrowing costs and falling currencies will weigh on the profitability of the banks in question and erode their balance sheets.  With Eastern Europe’s underperformance dragging down that of the Euro Zone, investors are unwilling to hold the Euro as political and economic risk spur a flight to safety, pushing the currency to a two month low.  Interestingly German ZEW economic sentiment registered higher than expected.  However, despite the better-than-expected economic sentiment, the common currency will likely remain under pressure in the near term as investors remain risk inverse.

 

The JPY is lower this morning despite rising against most European currencies in a resurgent wave of risk aversion.  Many had expected the yen’s appreciation to be addressed at the G7 meeting this past weekend, however, other than a few incoherent drunken comments from the Japanese finance minister, the yen was not discussed directly.  The yen has also pared some of its recent gains against the dollar as Japanese GDP fell nearly 13% in Q4 ’08, a steeper than expected decline.  In the short term, expect the yen to remain towards the lower end of its ranges as its preferred status as “safe” investment erodes. 

 

The GBP is lower this morning as record U.K. borrowing weighs on the pound.  Prospects of bond purchases by the BOE as the Bank’s key rate moves lower towards 0%, have also weighed on the currency.  Sterling’s declines were capped however as inflation data registered a smaller decline than expected.  The British government is issuing records amount of government debt to plug the economies budget deficit as rising unemployment curbs tax receipts, which will weigh on the pound as sufficient demand for government debt is not assured.  The pound also remained lower as British officials made it known at this past weekend’s G7 summit that they do not oppose sterling’s current levels as it makes their exports more competitive.  However, with global demand for said exports declining significantly, it remains to be seen how long this indifferent approach to sterling’s weakness can last.  In the short term, expect the pound to move back towards the lower end of its ranges as there is little positive news for the British economy. 

 

US$ Mixed as G7 Summit Begins in Rome

The US$ gained against the JPY, remained flat against the EUR and fell against the GBP.  Risk aversion abated in late trading yesterday afternoon as a plan was announced to subsidize U.S. mortgages for those who pass a “litmus test”.  Details are forthcoming from the Treasury department later this morning or afternoon.  The greenback was also on the back foot this morning ahead of this weekend’s G7 meeting in Rome at which foreign currency will surely be one of the hot topics.  While a “realignment” foreign exchange is highly unlikely, policy makers around the globe have made it clear that they too are in support of Treasury Secretary Geithner’s pledge for a strong dollar.  However, demand for the dollar fell off yesterday as stocks staged a comeback rally on news that the U.S. government’s plan to subsidize mortgages, coming days after the Treasury failed to provide any details on a plan to bolster U.S. banks.  This weekend will be the first major appearance as Treasury Secretary for Geithner on the international stage, and a rough introduction may be in store.  International policy makers are up in arms over a “Buy American” clause in the fiscal stimulus bill, and protectionism will likely be a main focus of the meeting.  The fiscal stimulus bill may also find its way on to President Obama’s desk as early as this weekend after the House and Senate came to agreement earlier this week.  However, this is not to say that the U.S. economy remains in a precarious state.  Moody’s investor services stated that the AAA ratings of the U.S. and Britain are “being tested” by the global recession, while Germany and France are proving “more resilient.”  In the short term, expect the dollar to remain towards the better end of its recent ranges, as stocks are set to open mixed.

 

The EUR remained under weight this morning after testing its multi-month low against the dollar yesterday.  The Euro Zone economy contracted at the steepest pace on record in Q4 ’08 as a particularly weak performance in the regions largest economy, Germany.  Industrial output in France and Italy also disappointed as the global economy contracts.  The EUR however pared its declines from yesterday ahead of this weekend’s G7 meeting in Rome.  Currency fluctuations have been the focus of global central bankers for the past several months as consumer demand slips around the globe.  Most notably, French Finance Minister Lagarde called for intervention to halt the decline of the British pound as the French auto industry struggled to compete with its British counterpart as a weaker sterling made the British goods relatively cheaper.  While a coordinated effort to realign currency markets is unlikely, the euro will likely remain within its recent ranges today as investors are unwilling to take a position ahead of the meeting.

 

The JPY weakened overnight as stocks halted their recent decline on rumors the U.S. government is planning to subsidize mortgages.  The intent will be to jump start the economy by first bolstering the U.S. consumer’s home value with the hope that it will boost spending.  The yen also weakened ahead of this weekend’s G7 summit in Rome at which the appreciation of the yen may be a hot topic.  Japanese finance ministers have made it clear that they want a weaker yen and they do not want European or American economies to turn protectionist.  With the Japanese feather’s ruffled over the U.S. fiscal stimulus plan’s inclusion of a “buy American” clause, coordinated effort to weaken the yen is unlikely.  In the meantime, the yen will likely push towards the lower end of its ranges as risk aversion abates.

 

The GBP has traded in extremely wide ranges against most major currencies ahead of the G7 summit in Rome.  European finance ministers have been particularly outspoken about wanting a strengthened pound as British goods have become much more affordable in comparison to their European counterparts as the pound plummeted over the past 6 months.  British officials however have not been opposed to a weaker currency as their economy slips deeper into recession.  While direct intervention remains unlikely, the mere prospect of currency market manipulation will likely keep the pound off its recent lows.

US$ Gains as Geithner's Plan Fails to Assuage Investor Fear

The US$ is higher this morning as the buck continues to benefit from its role in a flight to safety.  Following a disappointing bank plan announcement with little to no details from Treasury Secretary Geithner two days ago, global stock indexes have declined now three days in a row.  Geithner did however say yesterday in a press conference that details are forthcoming, saying that, “we're going to move forward very quickly to come out with detailed design elements on these proposals I outlined [Tuesday].”  However, in the meantime, the U.S. economy continues to spiral downwards.  Weekly Jobless Claims were released this morning registering 623K, 13K higher than expected, highlighting the plight of the U.S. economy.  Yesterday, the House and Senate came to agreement on a fiscal stimulus plan with a price tag near $800 billion, set to make it on to President Obama’s desk by as early as the end of this week.  However, critics believe that the bill is long on “pork barrel” spending, and short on immediate economic fixes for the average American family as they face rising unemployment and plummeting home values.  A report yesterday also showed that the budget deficit swelled to its widest levels in six years at -$40 billion.  The drop largely reflects the global economic malaise, but has many speculating that Q4 ’08 GDP will be revised down from the already low –3.8% to as low as –5%.  Retail Sales on the other hand registered better than expected this morning, capping the measures seven-month slide with a gain of 1%.  While the number appears to be an anomaly, due largely to slightly higher gasoline prices in the month of January, any positive economic data provides a bit of breathing room.  The dollar has however remained well supported against most majors other than the yen as the dollar remains a relatively “low risk” investment.  This weekend also sees Secretary Geithner’s first G7 summit in Rome at which there is some speculation that a “realignment” in foreign currency will be discussed, focusing on the GBP and JPY.  Geithner is also expected to drum up support for coordinate global efforts to spur the world economy out of its current slump.  For today, expect the dollar to remain supported as stocks are expected to decline this morning thus spurring on investor demand for quality.

 

The EUR remained under pressure overnight as economic data continues to sour.  Industrial Production in the Euro Zone slid 12%, far bigger than the expected drop of 9.5%, marking the largest decline since 1986.  The report came after the Spanish government showed that the economy contracted 1% in Q4 ’08 as the region suffers through the worst recession since WWII.  German inflation also fell to 0.9%, well below the ECB’s 2% ceiling, leaving room for further interest rate cuts.  ECB member Quaden commented that, “[the ECB] will await the next meeting in March, but I have no objections -- and I think this is the case for a great number of my colleagues -- to lowering the rate if it is justified. I am not in a hurry to go towards a zero rate or close to zero, but given the prospects of significant deteriorating activity and lower inflation...I am absolutely ready to go below two per cent.”  With expectations for a cut in Euro Zone interest rates, the common currency will remain under pressure in the near term.

 

The JPY is slightly higher this morning as risk aversion continues to benefit the yen.  The yen gained as global stocks slid for a third day in a row.  Investors fear that the Obama administration’s plans to revive bank lending will fail and ultimately boosting demand for the yen in a flight to safety.  The yen also remained well supported against European currencies as prospects for further rate cuts from the ECB bolsters demand for the Japanese currency.  In the short term, expect the yen to remain supported as stocks are set to open lower.

 

The GBP is lower this morning on fear that the British recession is deepening.  Yesterday, BOE Governor King stated that the British economy was in “deep recession”, which may prompt policy makers to continue cutting interest rates, even though they can’t go much lower, and pump money into the economy.  A separate report showed that loans for home purchases fell last year to the lowest levels since 1974, down some 49% from the previous year.  King however has not been opposed to a weaker currency, citing the lower pound as providing support to the flagging economy.  However, after the pound’s steep decline over the past six months, the currency is expected to be the hot topic of discussion at this weekend’s G7 summit in Rome.  However, short of a massive coordinate intervention, the pound will likely remain in these lower ranges as economic underperformance in the U.K. will keep the pound under pressure.