Today’s data releases have sparked a round of profit taking on the US dollar this morning moving it lower against most majors. The December industrial production dropped -2.0%, much worse than the -1.0% decline expected.
December capacity utilization fell to the lowest reading since December 2001.
Manufacturing output declined -2.3% vs -2.2% in November.
Additionally, a government report showing a continued drop in U.S. consumer prices helped revive investor risk appetite, moving currency flows to higher yielding currencies and out of the USD and JPY. The closely monitored Consumer Price Index dropped 0.7% after falling 1.7% in November, falling for a third straight month.
Worries about the US banking sector were not far from investors' minds, as Citigroup and Bank of America both reported fourth quarter losses totaling over $10 billion. This was the first loss for B of A and fifth straight for Citi.
The Senate has agreed to release the second half of the $700 billion TARP money as President-elect Obama has requested, which may assuage some banking sector concerns.
Also, Democratic leaders in the House of Representatives unveiled an $825 billion tax cut and spending bills they hope will help Obama reverse the economic slump, offsetting fears of soaring losses at the top three U.S. banks.
The euro is benefitting from the dollars shortfall ahead of the long weekend.
Keeping the euro well supported is yesterday’s rate cut announcement coupled with the possibility of additional cuts signaling added stimulus for the economy, though no moves are anticipated in February.
The rally may be short lived as investors worry that the ECB is moving too slowly in lowering rates to combat the rapid deterioration in the euro zone economy.
With banking sector bailouts a key theme in markets today, the British pound surged nearly 2% against the USD and 2.5% against the yen as investors changed direction from recent weeks extreme risk aversion in favor of high yielding currencies.
The Times newspaper reported British ministers would be hammering out a package that could include fresh capital injections for U.K. banks, helping to support the pound. Though this news is GBP supportive, analysts are still concerned with England’s economic woes.
Bank of England Deputy Governor John Gieve said in a speech he expected the British economy to contract at its sharpest rate in decades this year and the main challenge was now to prevent a deep recession.
After benefitting in recent months from a safe haven status as the rest of the globe was rocked by financial and banking strife, the Japanese yen stumbled today following a sharp rise in global bourses and easing risk aversion.
Markets remain unstable and it is likely that the yen weakness will be short-lived.
The Canadian dollar rose today after falling five straight sessions against the USD, supported by firmness in commodity prices and a return by investors to riskier assets as world equity markets rallied. The recovery comes after the Canadian unit touched its weakest level in a month against the USD yesterday.
The beleaguered Australian and New Zealand dollars regained their footing boosted by the turn in market sentiment. The currencies were able to climb nearly 2% against the USD as investors turned back to riskier investments.
This is a relief to the kiwi which is off 7-year lows against the yen.
