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US$ Slips Against EUR and GBP, but Gains on JPY as Stocks Are Set to Rebound

The US$ lost ground overnight against both the EUR and GBP, but gained on the JPY.  The dollar had gained yesterday in a slight reemergence of risk aversion as global stocks fell lower with both GM and Chrysler nearing bankruptcy.  Investors however have shrugged off the data this morning, and stocks appear set to recoup some of their losses.  The Obama administration has made it clear for some time that it would “get tough” on Detroit’s automakers, but many did not believe that would include bankruptcy.  The dollar however has remained relegated to wide ranges this morning as investors jockey positions ahead of the G20 summit, ECB meeting and Non Farm Payrolls Report later this week.  Expectations for the G20 summit are high, but as has been the case in the past, the most likely outcome will be strong words with little to no concrete action.  However, in such extraordinary times, the most that can be expected is the organization of a Financial Stability Board, despite having no regulatory teeth, a possible coordinated increase in funding for the IMF to “bailout” Eastern Europe and other struggling emerging markets, and pressure for the ECB to fall into line and adopt some measure of unconventional easing like their U.S., British, and Swiss counterparts.  This morning, investors will take not of the S&P CaseShiller Home Price Index, expected to register 147.20, due out at 9:00, and Consumer Confidence, expected to show a modest increase to 28, due out at 10.  In the short term however, expect the dollar to remain range bound against most major currencies. 

 

The EUR is higher this morning, albeit within its ranges ahead of this Thursday’s ECB meeting.  While the ECB is expected to cut interest rates by a further 50bps, traders appear hesitant to buy US$ in lieu of euros as GM and Chrysler near bankruptcy.  The common currency shrugged off early negative data, showing that unemployment in Germany, the Euro Zone’s largest economy, rose to 8.1% last month, and inflation fell farther than expected.  With the Euro Zone’s first recession apparently worsening, the ECB has increased room to move rates lower, but as they near 0% further, unconventional measures will likely be discussed.  This comes before this week’s G20 summit at which pressure on the ECB to enact such unusual measures will likely increase.  However, it remains to be seen if the ECB will be able to implement a debt purchase, let alone be allowed to per its mandate, and which member nation’s debt the Bank would buy.  Unlike the Fed, which overseas regional branches, but all part of one greater economy with one Treasury, the U.S. Treasury, the ECB overseas 16 separate nations, each with their own central banks, and their own Treasuries.  However, ahead of this week’s G20 summit and ECB meeting, expect the common currency to remain range-bound.

 

The JPY is lower this morning as fundamentals weigh on the Japanese currency and the fiscal year draws to a close.  Rising unemoloyment, and falling spending shows that Japan continues to be mired in its worst recession in 60+ years.  On the data front, Japanese home prices fell –24% last month, year over year, and unemployment touched a three-year high of 4.4%.  However, ahead of key risk events later this week, the yen will remain in its ranges, albeit with a negative bias as the fiscal year draws to a close.

 

The GBP is higher this morning, snapping a four-day loosing streak.  U.K. consumer confidence registered better than expected, rising to the highest levels since May.  The index rose to –30, up from –35 last month.  PM Brown had encouraging comments yesterday before this week’s G20 summit.  “We must take action necessary to prevent the suffering of the past in mass long-term unemployment and save and create more than 20-million jobs” Brown said.  If British data begins to signal a possible bottom for the U.K. economy, the pound may rise over the next several weeks.  However, that scenario does remain unlikely, and the pound will ultimately weaken as the BOE’s actions of cutting interest rates to near 0% and printing cash weighs on the currency.  In the meantime, expect the pound to remain range-bound ahead of this week’s G20 summit. 

US$ Gains on Renewed Wave of Risk Aversion as U.S. Automakers Teeter on Bankruptcy

The US$ is stronger this morning as risk aversion returns with a vengeance.  Over the weekend, U.S. government officials said bankruptcy might be the best option for both General Motors and Chrysler, thus spurring investors to seek the perceived safety of the dollar and the yen.  The two embattled automakers have already received billions in taxpayer dollars and with no apparent structural changes to the companies having taken place yet, it appears the government is not ready to throw more good money after bad.  The dollar is also up this morning ahead of this week’s ECB policy meeting at which the Bank is widely expected to cut interest rates by a further half percent and perhaps suggest adopting unconventional measures as rates approach zero, such as printing cash.  Stocks have also started the week off on a negative note.  Over the weekend, Treasury Secretary Geithner suggested that some U.S. banks will need further government aid, hinting that the recession is far from over.  Global indexes were lower this morning, which has also prompted investors to flock to the dollar in the near term.  This week also sees an important G20 summit on Thursday in London at which U.S. government officials are expected to urge their counterparts to enact similar economic stimulus measures, which many European officials in particular are at odds with.  This morning sees little major economic data, and thus the direction of the currency market will likely regain a correlation with the stock market.  Tuesday sees the release of S&P CaseShiller Home Price Index, Chicago PMI and Consumer Confidence.  While the middle of the week sees Challenger Job Cuts, ADP Employment (both good harbinger’s of the all-important non farm payrolls), ISM Manufacturing, Pending Home Sales, and Construction Spending all on Wednesday, and Weekly Jobless Claims, and Factory Orders on Thursday.  The week closes out with Non Farm Payrolls, the most recent reading of the Unemployment Rate, and ISM Non-Manufacturing all on Friday.

 

The EUR is lower this morning on a renewed wave of risk aversion.  Over the weekend, U.S. government officials suggested that bankruptcy may be right for both GM and Chrysler and also that more U.S. banks will need cash bailouts.  With the news sending stock investors, many of which have only recently reentered the markets, to the exits, the common currency weakened as the perceived safety of both the US$ and the JPY were sought.  The common currency is lower ahead of this week’s ECB meeting at which the Bank is widely expected to cut interest rates by a half percent, and many suspect policymakers may endorse more unconventional plans as interest rates approach 0%.  Spain also announced this weekend that it will be seizing local bank, Caja Castilla la Mancha, compounding the euro’s woes.  With global stocks paring much of last week’s gains, and ahead of the ECB meeting this Thursday, expect the euro to remain under pressure in the short term.

 

The JPY is higher this morning as risk aversion pushed the currency higher.  The Obama administration rejected restructuring plans from both GM and Chrysler this weekend, and suggested bankruptcy as the most viable option.  Coupled with falling stocks, investors have sought the perceived safe haven status of both the dollar and the yen.  The dollar benefits as such due to its role as the world’s default reserve currency, and the yen benefits due to Japan’s relatively large trade surplus, leaving the yen less susceptible to other currencies’ wide swings.  However, the Japanese economy’s fundamental weakness will ultimately weigh on the yen in the medium to long term, with Goldman Sachs suggesting that fair value for the yen is 114.00.  In the meantime however, expect the yen to push marginally higher as stocks move lower. 

 

The GBP is lower this morning, falling as global stock indexes slump spurring on risk aversion.  The pound has slid against the dollar now four days in a row, further dragged down by an industry report showing that financial-services companies may eliminate as many as 15K jobs in the second quarter of this year, further compounding the U.K.’s labor woes.  The British currency is also lower this morning ahead of a G20 summit later this week in London, at which regulation in the financial markets will be front and center.  However, with currency unlikely to make it onto the G20’s agenda, sterling may under perform this week, as there are little to no economic fundamentals to support it.  In the meantime however, expect the pound to move lower in its ranges as risk aversion drives trade. 

US$ Gains on Outspoken Support for the Greenback as the Global Reserve Currency

The US$ gained overnight as much of the recent debate over the dollar’s role as the world’s default reserve currency was put to rest.  The recent debate, which focused on China’s proposal to move away from the dollar as the global reserve currency and towards a more international money such as the IMF’s SDR, come ahead of a much-anticipated G-20 conference next week in London.  The Japanese finance minister however stated in clear terms that he does not expect the dollar’s status to be discussed at the upcoming summit, and instead he anticipates finance officials to focus on the global economy, financial markets, and protectionism.  Reportedly, a Russian finance minister echoed these sentiments, which is important, as the Russians have been outspokenly against the dollar’s role as the global reserve currency.  The OECD also released a statement in which they painted the dollar as the reserve currency “par excellence”.  So, with questions about the greenback’s status largely out of the picture, the dollar has strengthened against most major currencies this morning.  Commodity prices have also eased this morning, along with stocks paring some of their weekly gains, which has thus benefited the greenback.  While the tight correlation with stocks and the dollar is largely gone, risk assumption, rather than aversion, has been in focus this week.  This morning however, stocks are set for a lower opening this morning, which has pushed the dollar better on relatively higher-yielding currencies.  This morning, the market took note of Personal Spending data, which registered in line with expectations at 0.2%.  Investors will also watch this morning’s release of U. of Michigan Confidence, expected to register a modest increase from last month at 56.8.  In the short term, expect the dollar to pare much of its weekly losses as confidence in the greenback is restored.

 

The EUR is lower this morning on negative comments out of Germany and broad dollar-strength.  German Finance Minister Steinbruek, stated that too much debt could have a profound negative effect on capital markets should the Euro Zone stability pact not be taken seriously.  As it stands, a Euro Zone member nation is not supposed to run a deficit that is greater than 3% of GDP for more than two consecutive years.  As the global economic downturn worsens, and Euro member nations are forced to increase government spending despite contracting GDP, the number of countries in violation of said pact continues to increase.  Steinbruek went on to say that should the stability pact not be taken seriously, the EUR may be at risk.  However, in the meantime, expect the euro to pare some of its recent gains as outspoken support for the dollar as the world’s default reserve currency weighs on the common currency.

 

The JPY is stronger this morning in a slight renewal of risk aversion.  Economic data out of Europe, and the U.K. in particular, showed that the global economic downturn is in fact worsening.  Combined with what looks to be a profit-taking day on Wall St. as indexes move lower after three week’s of positive gains, the yen has benefited in its continued on-and-off role as a safe haven.  However, ultimately weakness in the Japanese economy will weigh on the yen, thus expect a lower Japanese currency in the medium to long term.  In the meantime however, expect the yen to remain supported today as global stocks push lower.

 

The GBP is much lower this morning after dismal economic data took the wind out of sterling’s sails.  The pound had moved significantly higher this morning as the dollar weakened, and investors seemed confident of a British recovery later this year.  However, since Tuesday, the U.K. economy, and thus the pound, has been battered with far worse-than-expected data.  First, on Tuesday, Britain suffered its first under-subscribed treasuries auction in nearly two decades.  On Thursday, the British parliament pleaded PM Gordon Brown to not support any further stimulus spending as the government attempts to fund the largest deficit on record.  Then this morning a report showed that Britain’s GDP declined in Q4 ’08 by more than forecasted at –1.6%.  The market seems to have been somewhat taken aback by the downwards revision, and if anything was expecting an upward revision.  In the short term however, expect the pound to remain under pressure as outspoken support for the US$ as the global reserve currency weighs on the sterling. 

US$ Consolidates in Lower Ranges after Geithner Backpedals on Reserve Currency Comments

The US$ is weaker this morning against most major currencies, as it continues to reel from commentary from the Treasury Secretary.  Yesterday, Tim Geithner commented on the Chinese Finance Ministers proposal to adopt an international reserve currency other than the US$.  Geithner was quoted as saying the idea is intriguing, and that the Finance Minister is a smart man and his opinion should be explored.  While on a professorial level, Geithner was correct, as the Treasury Secretary of the United States, and with his policies largely determining the direction of the current default reserve currency, the dollar, the comments were detrimental.  Geithner did however immediately backpedal on the issue, stating that the administration still sees the dollar as the international reserve currency going forward and that he does in fact support a strong dollar policy.  However, in light of recent spending programs in which the government has amassed a substantial multi-trillion dollar debt, the argument for a strong dollar appears to be tenuous at best.  A debt auction yesterday, the first major one of the year, was fully subscribed, but yields were higher than forecasted, meaning that investors had to pay more for the instruments than expected.  Coming a day after the U.K. suffered their first failed auction in nearly two decades, difficulty in attracting sufficient demand may hinder future auctions.  The greenback has thus been on the back foot for much of the Asian and European sessions, as investors are apprehensive to bet on dollar strength, at least in the near term.  This morning traders also took note of the final reading of Q4 ‘08 GDP, which was revised lower to –6.3%, and weekly jobless claims rose to 652K and continuing claims maintained their climb to 5.56M.  The economy has already shed 1.2M jobs so far in 2009, as corporate profits dropped in Q4 ’08 by 16.5%, the steepest since 1953.  However, with the recent rise in retail sales, manufacturing numbers, and housing data, the drop in GDP should moderate this quarter.  While the U.S. government’s plans will likely prove beneficial for the US$ in the medium to long term, in the near term, expect the buck to remain on the back foot as investors remain wary of the government’s ability to finance its massively expanded balance sheet.

 

The EUR is relatively flat this morning, consolidating in its higher ranges.  The common currency pushed higher yesterday morning as comments from U.S. Treasury Secretary, suggesting that a Chinese idea to introduce a more global reserve currency may be valid, were taken out of context.  While Tim Geithner did reiterate he supports a strong dollar, and sees the greenback as the world’s default reserve currency for the foreseeable future, the mere prospect of the dollar loosing its global status has pushed the EUR and other European currencies higher this morning.  However, the EUR’s gains were capped by commentary from ECB member Wellink in which he stated that, “the ECB could use unconventional monetary policy, on top of the unusual expansion already implemented, if the interest rate instrument can’t be used further because of (almost) reaching the zero-rate limit.”  He also stated that, “for the Euro Zone, we can’t rule out that months of negative price rises will occur, which isn’t a problem in itself as long as consumers don’t continuously postpone spending in the hope of further price declines.”  Thus, while the common currency is benefiting from a modest recover in investors’ risk appetite, in the medium to long term, the Euro Zone’s woes and lagging business cycle will ultimately weigh on the common currency. 

 

The JPY is lower this morning as rallying stocks improves demand for higher-yielding assets.  Earlier this week, the U.S. Treasury Secretary’s unveiling of a plan to buy up banks’ toxic assets set stocks on track for their third straight weekly gain.  The modest recovery in risk appetite has encouraged investors to look for higher yields than the ultra low .1% in Japan and .25% in the U.S.  A recovery in commodity prices has also encouraged a modest reentry of the carry trade, seeing the AUD, NZD and ZAR as the main beneficiaries.  The Kiwi was the biggest winner overnight, as a report showed that New Zealand’s deficit did not in fact grow last quarter, thus securing the island nation’s investment rating status.  In the short term, do expect the yen to remain on the back foot, with its overall direction being tied to the performance of global stock indexes.

 

The GBP is relatively flat this morning, despite trading through a particularly volatile overnight session.  Yesterday, Britain suffered its first failed gilt (treasuries) auction in decades as the British government auction off 1.75B pounds, but only sold 1.6B.  However, the pound’s drop after the auction has been deemed as overdone, and the failure may be an anomaly.  However, fundamental support for the pound remains absent.  February retail sales fell 1.9%, more than forecasted, as bad weather and dismal economic conditions kept consumers home.  In light of renewed worries that the government may not be able to sufficiently fund its historic spending programs, the pound has remained highly volatile with its overall bias to the negative side.  The failed gilts auction serves as a reminded that significant fiscal easing and quantitative easing is not risk free and can, and likely will, cause considerable volatility.  In the short term however, expect the pound to remain range bound as investors focus on U.S. policy maker’s actions.

US$ Consolidates as Investors Gain Confidence

The US$ is mixed this morning, falling slightly against the EUR and JPY, while gaining on the GBP.  Investors appear to remain positive on Treasury’s plans to buy toxic assets off of banks’ balance sheets, despite Wall St. paring some of its Monday’s gains yesterday.  Positive sentiment for the U.S. economy continues as fundamentals surprise on the upside.  As retail sales, housing data, and now durable goods orders all register higher than expected, investors are reassured that the U.S. is in fact set for recovery later this year.  Durable goods registered an increase of 3.4% in February, after contracting 7.3% in January.  Excluding transportation, orders gained 3.9%, the biggest jump since 2005.  The dollar has thus remained in lower ranges against most major currencies as its allure as a safe haven investment fades.  This morning, investors will also take note of New Home Sales data, expected to register 300K, down from last months 309K.  However, in light of the recent spat of better-than-expected readings, the market will be expecting a better-than-forecasted number.  With stocks set to open mixed this morning, any weakness in this number may turn indexes negative.  However, with the correlation between stocks and the dollar largely gone, expect the dollar to remain towards the lower end of its ranges as investors gauge the long-term affects of the government’s plans to jumpstart the economy.

 

The EUR is relatively flat this morning, consolidating in its new higher ranges as risk assumption supports it.  With global stocks on track for a third-straight weekly gain after the U.S. Fed and Treasury each announced plans to bolster the flagging U.S. banking sector, investors have reduced their safe haven bids, which had seen euros sold for dollars.  However, the prospects for a Euro Zone recovery remain hinged to the success of the U.S government’s plans.  This morning the Ifo Institute showed that German business sentiment slumped to its lowest level since German unification in 1990, albeit in line with expectations.  The Euro Zone business cycle is behind that of the U.S. by roughly nine months, and thus the full affects of the economic contraction have likely not been seen yet in the region.  However, in the short term, expect the euro to remain relatively well supported as the correlation between currencies and stock markets decouples. 

 

The JPY consolidated overnight as BOJ commentary left investors skeptical about the Japanese economy.  The yen has weakened as of late as safe haven bids reverse from the yen, as investors become wary of the Japanese economy’s strength.  Overnight, the BOJ Deputy Governor, suggested that while Japanese interest rates sit at an ultra low 0.1%, further cuts are not out of the cards.  He also alluded that the Japanese government would not exceed its current limits on purchasing government debt.  While fundamentals remain weak in Japan, expect the yen to remain in its recent ranges as the end of the fiscal year continues to provide support ahead of the end of the month.

 

The GBP is lower this morning on disappointing results from a treasuries auction.  The British government put up for auction 1.75 billion pounds, but only 1.64 billion were bid on, signaling the government first failed gilts auction since 1995.  This does not bode well for the U.K. as Gordon Brown’s government plans to sell an unprecedented 146.4 billion pounds of debt this fiscal year alone as Europe’s second largest economy grapples with its first recession since 1991.  While the auction may be anomaly, considering the instrument up for auction was at the riskiest end of the yield curve, but either way it does not bode well for an economy whose deficit has ballooned to record levels.  In the short term, expect the pound to remain towards the lower end of its ranges as investors gauge the health of the U.K. economy with that of its G7 counterparts 

US$ Consolidates a Day After Market Rally

The US$ is mixed this morning, gaining against both the EUR and JPY, while falling against the GBP.  Yesterday, stocks staged their biggest single-day rally since mid-November, rising nearly five hundred points.  It took seven weeks of Barack Obama’s presidency for stocks to hit a multi-decade low, but it only took ten days for the markets to turn around, surging some 22% in the fastest transition to a bull market since 1938.  The Obama administration had made it clear from the start that they would not base their decisions on the performance of the stock market, but as it declined at a quickening pace, Obama and Treasury Sec. Geithner took a gamble in what some are calling the “nuclear option”, and it appears to have at least instilled confidence.  As banks surprisingly report strong performance in the beginning of 2009, the Fed has agreed to purchase north of a trillion dollars in mortgage backed assets and long-term treasury bills, while the Treasury’s plan includes buying hundreds of billions of dollars of “toxic assets” off of bank’s balance sheets in conjunction with private sector investors.  While this is good news for the U.S. economy, it has been detrimental for the dollar.  With the U.S. government and Fed effectively lowering long-term interest rates and flooding the market with dollars, as they turn on the printing presses to pay for their new spending programs, the greenback has lost its allure as a safe haven instrument.  However, with the dollar remaining the world’s default reserve currency, in the medium to long term, these plans will in fact benefit the dollar, as the U.S. economy will be the first out of recession.  Interestingly, a weaker currency, as we are seeing now, will also likely raise inflation as imports become more expensive.  With retail sales showing signs of recovery, and with likely heightened inflation, talks of a Fed rate hike, which would be dollar positive, may be in the cards by the end of the year.  However, in the short term, expect the dollar to remain under pressure as traders gauge the near term effects of such large spending programs.

 

The EUR consolidated overnight in its new higher ranges on the heels of U.S. Treasury Secretary Geithner’s plan to buy toxic assets off of bank balance sheets.  With the Fed now providing details on how exactly they will move forward, stock markets cheered the news.  Combined with the U.S. Fed’s plan to buy mortgage backed securities and long term treasuries, the euro has gained against the dollar as the market becomes saturated with the greenback.  The EUR has also gained as the ECB’s reticence to do just about anything, has left Euro Zone interest rates near the highest amongst industrialized nations.  With the ECB presiding over 16 separate member nations, each with their own central banks and financial system, it is highly unlikely that the ECB would be able to enact a similar treasury-buying program.  So while the ECB’s lack of action in fact has benefited the currency as of late, the move is predicated on the belief the U.S. plan will work.  In the near term, do expect the euro to remain well supported as global stock indexes reverse the earlier bear market, but do not anticipate a breakout move higher as serious concerns over the health of the Euro Zone economy persist.

 

The JPY touched the lowest levels of 2009 overnight as risk assumption picked up pace.  With the yen slipping, despite the fiscal year end, during which Japanese companies repatriate funds to “window dress” their balance sheets, there have been rumors that there is a modest reemergence of the carry trade.  With Japanese interest rates sitting effectively at 0%, and with Australian and New Zealand (amongst others) interest rates sitting relatively high, investors have reentered the practice of borrowing yen and investing in a higher yielding assets and benefiting from the interest rate differential.  The AUD and NZD have thus been led higher, due in part to the precipitous drop in the US$ of the past week, which in turn has pushed commodity prices higher.  While the yen will remain range-bound ahead of the end of the month, the trend will likely be for a weaker Japanese currency in the medium to long term.

 

The GBP is higher this morning after the latest reading of inflation showed that price growth was still above the BOE’s target of two percent.  Consumer prices unexpectedly rose 3.2% from a year earlier, more than a half percent higher than the median forecast.  With the measure pushing above 3%, BOE Governor King was required to write a letter explaining the rise, in which he cited the pound’s weakness as a key contributor to the higher reading of inflation.  For example, Ford has announced that it will be raising its prices in England since its profits have dropped some 25% just due to the pound’s fall last year against the US$.  King however explained that while the decline in the pound “was very likely, [he] sees no reason why it should go any lower.”  British lawmakers have not been outspoken about the pound’s drop either way, but many believe they have supported the decline, hoping that British exports would see a rise.  However, with British purchasing power eroding, and inflation apparently rising as the BOE enacts similar quantitative easing measures as the U.S., calls for at least a bottom in the pound may increase in the near future.  In the meantime however, expect the pound to remain towards the higher end of its ranges. 

US$ Slips as Treasury Unveils Bank Bailout Plan

The US$ slipped against both the EUR and GBP this morning, while gaining against the JPY as the U.S. Treasury began the week in full swing.  Following up last week’s announcement from the Fed that they would be purchasing over a trillion dollars of mortgage backed securities and long-dated treasury bonds, Tim Geithner’s Treasury announced today that they would be using up to $300 billion from the left-over TARP funds to buy toxic assets.  While the details of the plan will not be unveiled until later this morning, Geithner is expected to say that the only way to remove the troubled assets clogging the banks’ balance sheets is with the help of the private sector.  To encourage private investors to buy said assets, the U.S. government will offer lucrative subsidies and carry much of the risk.  The dollar has thus been on the back foot this morning as the combined affects of lowered risk aversion and lower long-term interest rates both weigh on the greenback.  This morning, investors will take note of Existing Home Sales, expected to show 4.45M, versus 4.49M last month.  The middle of the week sees the release of Hose Price Index, and Richmond Fed all on Tuesday, and Durable Goods and New Home Sales on Wednesday.  The week closes out with Weekly Jobless Claims on Thursday, and U. of Michigan Confidence on Friday.  After last week’s surprisingly better than expected New Home Sales and Retail Sales, investors will be looking for at least housing and manufacturing data to surprise on the upside.  However in the near term, the market will be focused on Geithner’s plan details and the direction of the stock market.  Thus, for today, expect the dollar to remain lower against currencies that offer a better yield, and European currencies in general.

 

The EUR is higher this morning, temporarily benefiting from the ECB’s reticence to act.  ECB President Trichet said over the weekend that the Bank does not have to boost stimulus spending more to combat the economic downturn.  Instead, Trichet suggested that central banks need to move faster and enforce what they already have in place.  However, its important to note that Trichet is saying this only after the U.S. Fed announced it would be buying over a trillion dollars worth of mortgage backed securities and long-term treasuries in the world’s largest economy.  Europe’s hopes rest on the success of the U.S.’s plan to jumpstart the economy.  The ECB, unlike the Fed, oversees 16 separate nations, all with their own central banks, and more importantly, their own treasury bonds.  Unlike the Fed, which is able to buy U.S. treasuries, if the ECB was to enact a similar policy, which nation’s bonds they would buy would be subject for debate.  However, currently the ECB lack of action has benefited the common currency in the near term as it maintains a slight yield advantage.  In the short term, expect the EUR to remain buoyed as the Fed is expected to announce plans to use the other half of TARP funds this morning.

 

The JPY is lower this morning as global stock markets push higher.  While the yen’s status as a safe haven currency has all but disappeared against the US$, its inverse correlation between stock markets and the EUR/JPY and GBP/JPY pairs remain intact.  The yen is also lower this morning as bets increase that the U.S. Treasury and Fed’s actions to bolster the world’s largest economy will spur demand for higher-yielding currencies, such as the AUD and NZD, both of which surged this morning.  In the short term however, expect the yen to remain range-bound, as the upcoming end of the fiscal year in Japan caps its downside.

 

The GBP is stronger this morning as rising stock indexes and the U.S.’s plans to stimulate the U.S. economy boost demand for riskier assets.  British stocks were led higher as both Barclays and Lloyds announced better than expected outlooks for 2009, coming a week after global stocks rallied, led higher by financials.  However, the pounds decline against both the dollar and the euro will likely resume in the medium term as British interest rates sit at all-time lows and the BOE prints money to buy up government bonds in quantitative easing.  While the plan’s seem similar to that of the U.S., the pound does not benefit from the dollar’s status as the default world reserve currency.  In the meantime however, expect the pound to remain higher as investors digest the immediate impact of the U.S. government’s plans to bolster the economy.

 

 

US$ Consolidates After Record Weekly Drop

The US$ moved higher overnight against most major currencies, consolidating in its new lower ranges.  However, the dollar remains on track for its worst weekly performance against a basket of currencies in 24 years as investors fear that the government’s plans to buy far-dated treasuries will undermine the fundamental value of the dollar as the world’s primary reserve currency.  At its current levels, the dollar index has lost 5% this week, just 0.2% away from the worst performance since 1973 when the Bretton Woods systems of fixed exchange rates was abandoned.  However, while the Fed’s decision to go down the quantitative easing route will, and has, put immense pressure on the greenback in the near term, and perhaps for the next several months, ultimately it will in fact lead to dollar strength.  With economic data having begun to surprise on the upside for the first time in months, and with stock markets recouping some 20% from their lows hit just two weeks ago, the Fed saw an opportunity to buoy the economy and took it.  However, with interest rates effectively at 0%, and having already expanded their balance sheet beyond anyone’s imagination (it jumped from $167 billion to over $2 trillion in just one week), the Fed appears to have run out of ammo.  Should this plan not work, the dollar, and the American economy, may be in for a difficult second half of ’09.  With no major economic data due out today, currency traders will take their cue from equity markets, which are expected to open higher this morning.

 

The EUR pared some of its recent advances, but is still headed for its best week since its 1999 inception, gaining over 6% from last Friday’s close.  The recent spat of euro strength came as a product of the U.S. Fed’s decision to expand their balance sheet, buying over a trillion dollars in mortgage backed securities and long-term treasuries.  With the U.S. central bank essentially flooding the market with dollars, the allure of the greenback, and any long-term yield advantage it may have had, has faded quickly.  The ECB conversely has been far more reticent to act, and thus the euro’s appeal as providing some return remains intact.  In the short term, do expect the euro to end the week significantly higher against the dollar, but ultimately going forward the EUR will push lower as the Euro Zone economy lags.

 

The JPY lost some ground overnight as the dollar pared its losses and commodity currencies pushed higher.  With both gold and oil pushing to 2009-highs yesterday, investors have sought the returns of the AUD and NZD.  The Kiwi was in fact the biggest gainer of the week, gaining some 7% against the dollar.  Following the Fed’s decision to flood the market with cash and purchase literally trillions of dollars in mortgage backed securities as well as long-term treasuries, investors have sought the allure of gold as fear of inflation in the long term rises.  The knee jerk reaction after the Fed’s decision was to sell the dollar against all major currencies, however over the next few weeks, expect the dollar to pare some of its losses as traders reevaluate which currencies the dollar should be sold against.  In the meantime, expect the yen to pare much of its gains as the Japanese economy remains in turmoil.

 

The GBP is lower this morning, but remains on track for its best performance in two months.  The pound pared some of its recent gains however as investors booked their profits ahead of the weekend.  Sterling however, has remained relatively high against the dollar as a report suggested that the BOE’s efforts to increase lending at the consumer level may be paying off.  A BOE report suggests that mortgage approvals, which have fallen to about a third of their long-term average, may have reached a bottom.  A slowing in the plunge in consumer confidence, pared with historically low home prices may also serve as a spark to increase housing market activity.  However in the meantime, do expect the pound to consolidate, with its direction determined by investors thoughts on how the Fed’s plans will effect the world’s largest economy. 

US$ Suffers Worst Drop Since 1985 as Fed Expands Balance Sheet on a Massive Scale

The US$ is significantly weaker this morning against all major currencies.  Yesterday afternoon, the U.S. Fed announced that it would be buying upwards of a trillion dollars in debt.  Bernanke and co. have designated $750 billion to go towards buying the much talked about Mortgage Backed Securities, $300 billion to buy long-date treasuries, and $100 billion towards Government Sponsored Entity debt (Fannie Mae and Freddie Mac) in a last resort bid to stop the financial bleeding.  With the Fed undertaking its first significant purchase of government debt since the early 1960’s, and essentially turning on the printing presses to pump out cash to cover the bills, the dollar index suffered its worst single day drop against the sixteen most traded currencies since 1985.  The yield on the ten-year Treasury bill, upon which 30-year fixed rate mortgages are based, suffered its biggest single day drop since 1987.  While this compounds the dollar’s woes, the Fed hopes that the affects will be significantly lower mortgage rates, and thus an imminent recovery in the housing market.  The market is now left to consider whether the stimulative effects of the Fed’s action will lead to a stronger dollar in the long-term as the U.S. economy emerges from the current crisis ahead of its Euro Zone counterparts, or if the inflationary affects of such drastic action will ultimately be the cause of dollar weakness.  It is important to note though, that while the U.S. has just massively expanded its balance sheet, they are not alone in printing money.  The British, Swiss and Japanese have all already taken similar measures to effectively lower the far end of the interest rates yield curve, but not on the same scale as the Fed.  This morning, investors took note of conflicting data, showing that initial jobless claims fell last week to 646K, versus an expected 655K, but continuing claims set a new all-time high at 5.473M.  Investors may also take note of Philly Fed data and Leading Indicators, both due at 10, but focus will likely be divided amongst stocks and bonds to see how the respective markets digest the Fed’s drastic actions.  In the short term, and possibly for the next few months, do expect dollar weakness, but in the long term, the dollar’s appreciating trend will ultimately prevail as the Fed’s measures spur on the recovery.

 

The EUR is significantly higher this morning after the Fed effectively lowered interest rates to negative.  While the Fed did leave the official target rate at its current range of 0 - .25%, they also announced they will be buying over $1 trillion in government debt and mortgage back securities.  While the move was the “last arrow in the quiver”, the scope of the Fed’s actions will be so much broader than expected, that the flood of dollars into the system has led the greenback lower against all major currencies.  The EUR has also benefited, as the ECB remains the last major central bank in the G7, with the exception of Canada, that has not enacted some form of quantitative easing.  While the ECB has discussed “nontraditional” measures, most do not expect the Bank to intervene in bond markets as a common Euro Zone “bond” does not exist.  It would be a much more complicated affair with the separate central banks of the Euro Zone member nations actually enacting the quantitative easing, to which some member nations are opposed.  Pressure on the euro was also relieved as the Fed’s actions will likely prove stimulative to the world’s largest economy, thus reducing risk aversion.  In other European news, the Norwegian Krone is the currency that has benefited the most over the past 24 hours in its new role as the “ultimate safe haven”.  With the Fed’s actions boosting commodity prices, Norway, the world’s fifth largest oil exporter, and with the government running a surplus, appears better set to weather the storm than many of its counterparts.  In the short and medium term, expect the euro to remain well supported against the dollar as investors digest the Fed’s decision to expand their balance sheet on such a massive scale.

 

The JPY is higher this morning against the US$ following the Fed’s decision to buy over $1 trillion in government debt and mortgage backed securities.  The actions came as the Fed’s last resort with interest rates already at 0%, and having already dumped billions of dollars in liquidity into the system to encourage lending.  The knee-jerk reaction affects of the actions though have been substantial, with the dollar falling against all major currencies by the most in at least a quarter century.  The yen has benefited in particular as the Fed’s quantitative easing overshadows the BOJ’s similar, but exponentially smaller, actions to bolster their banks.  In the short term, do expect the yen to remain supported against the dollar as investors mull over the Fed’s actions.

 

The GBP is significantly stronger this morning against the dollar after the Fed revealed plans to purchase over $1 trillion in debt and mortgage backed securities.  While the BOE has already enacted quantitative easing to an extent by buying long-term treasuries, the Fed’s plans far surpass that of the BOE, BOJ or SNB.  This has kept the dollar on the back foot since the announcement yesterday, but investors hope that it will be encouraging for the world’s largest economy.  While dollar weakness is to be expected in the near, and maybe even medium term, as the Feds actions may produce inflation, ultimately the stimulative effects will bolster the U.S. economy and thus the dollar in the long term.  The British economy on the other hand remains in dire straits.  The Confederation of British Industry said today that the forecast for U.K. manufacturers matched the worst since records began in 1975.  In the meantime, expect traders to watch stock and bond markets for direction in currencies.

US$ Weaker ahead of Fed Meeting and Possible Announcement on Quantitative Easing

The US$ is mixed against the majors, gaining on the GBP, falling on the EUR and remaining flat against the JPY as investors remain apprehensive to take substantial dollar positions ahead of this afternoon’s Fed rate decision.  While the Fed is not expected to change interest rates either way, the comments accompanying the decision will be scrutinized.  With the Fed having utilized nearly all the tools in its shed other than buying treasuries, many suspect that such action is inevitable.  If the Fed does enact such a policy, the dollar will likely soften over the course of the next several weeks as the Central Bank floods the market with dollars.  However, in the long term, government spending and the proactiveness of the Fed will likely lead the U.S. out of recession sooner rather than later, which will ultimately lead to dollar strength in the long term.  This morning, investors took note of CPI data, which registered slightly higher than expected at .4%, a day after PPI registered a similar gain.  The most recent reading of the Current Account also showed a slump in imports as consumer spending decreases and the cost of commodities eases.  However, the dollar will likely remain range-bound ahead of this afternoon’s Fed decision as stocks pare their gains from yesterday.

 

The EUR is higher against the US$ this morning.  The U.S. Fed appears poised to inflate their balance sheet on a massive scale, which will provide downside for the dollar in the short term as the market is flooded with cash.  However, the long term implications of the Fed’s level of proactivity will ultimately cause the dollar to outperform the EUR as the Euro Zone economy lags that of the U.S.  With the world’s largest economies having enacted massive spending programs, there has been a flood of government debt on the open market.  German and Spain alone auctioned off nearly $10 billion in debt yesterday, and Europe’s largest economy announced it suspects it will auction of a further 20 billion EURs in debt than previously estimated.  However, without full subscription to these auctions, the EUR’s downside risk is more apparent than that of the dollar as U.S. government debt still remains the “risk free” instrument upon which others are judged.  In the short term, ahead of this afternoon Fed announcement, expect the euro to remain range bound.

 

The JPY is relatively flat this morning despite a fall in global equities.  The Nikkei fell nearly 3% overnight, and the yen did not strengthen, reversing the tight correlation between equities and the Japanese currency, which has been in place for the past several months.  The yen also saw weakness as the BOJ stated that “given the expansion [they] have made, [they] must say there is very little room for the central bank to raise the amount of purchases further.”  However, in the meantime, the yen will remain range bound as investors gauge the health of the Japanese economy as the yen’s safe haven bid disappears. 

 

The GBP is lower this morning on disappointing employment data.  More Britons joined the jobless rolls than at any time since 1971, led by a drop in manufacturing and financials.  The rise in jobless claims was far higher than the expected 84,000 at 138,400.  The cuts came as the British economy continues to slip deeper into recession, with the financial crisis having now wipe out an estimated $2.6 trillion in household wealth.  The underperformance of the British economy has raised political tensions in the U.K. as nearly 1 in 10 Britons are out of work.  While the BOE and the British government officials have enacted large spending plans to bolster the economy, analysts believe they were “late to the party”, and had the current actions been taken six months ago, the current malaise would have likely been much more mild.  However, in the short term, expect the pound to remain bound to its ranges as investors focus on the Fed announcement later today.