The euro has been sidelined following the dollar’s surge. Weighing on the single currency are continued signs of a deepening recession. Spain’s unemployment level hit record highs, topping 3 million and is likely to rise further in 2009.
Manufacturing orders in Germany dropped by a much larger-than-expected 6% in November, hit by collapsing demand at home and abroad. As yesterday’s data showed, exports fell by an unprecedented 10.6% in November as demand for cars and other mainstays of the manufacturing economy plummeted, reinforcing expectations of a deep interest-rate cut by the European Central bank on Jan. 15.
The British pound remained firm against the dollar and the euro, as analysts said the bleak UK economic outlook and the prospect of more interest rate cuts by the Bank of England are now seen priced in to an already weak currency. The BoE cut interest rates by 50 basis points to a historic low yesterday, with further reductions expected as the central bank seeks to shore up a deteriorating economy. The pound has made significant gains so far in 2009 as investors take the view that the currency has been oversold towards year end.
The Japanese yen remains range bound, gaining strength from risk adverse investors despite continued losses on the Nikkei.
Following the lead of the USD, the Canadian dollar strengthened slightly following the release of Canadian jobs data which, while weaker than expected, was not as extreme as some market participants had feared. Thus, markets were relieved that the Canadian economy shed slightly more than 34,000 jobs in December while the unemployment rate rose to 6.6%. As in the U.S., analysts had forecast the economy shedding 80,000 jobs in December. Investors will see how the commodity prices react to the US news for additional direction on the CAD.
The Australian dollar remains on the defensive on Friday, as mounting concerns about a global recession kept investors wary of higher-yielding currencies and riskier assets. Following yesterday’s dismal domestic housing sector data, the risk of a recession in Australia was heightened. Exports fell, reflecting lower commodity prices and slowing demand from key Asian countries. Analysts are pricing in a 75 basis point rate cut when the Reserve Bank of Australia meets in February and another 50 basis points cut in March, which will significantly diminish the Aussie’s yield advantage.
The New Zealand dollar remains in recent ranges. Economists see a New Zealand recession extending well into this year, requiring more interest rate cuts to prop up the economy. Rates are currently at a 5 year low. The next rate review is on Jan. 29.
