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The euro begins the New Year at 3−week lows vs. the dollar

Wed, Jan 7 2009, 09:06 GMT
by Union Bank of California Team

Union Bank of California

USD – America’s currency finished the week and the year on a relatively quiet note, though the greenback’s potential energy is extremely high as it stands at the brink of significant breakouts ahead of a week full of scheduled event risk. The event risk will come on the heels of a deplorable showing of data releases during the final week of 2008: Consumer Confidence Index (38.0 in Dec. vs. 44.9 prior); Initial Jobless Claims (4-week Moving Average above 500K); ISM Manufacturing Index (32.4 in Dec.—a 28-year low—vs. 36.2 prior). Markets will be focused on the battery of key data releases throughout this week, beginning tomorrow with the ISM Non-Manufacturing Index and the minutes of the 12/16 FOMC meeting at which time the Fed Funds rate was slashed to a record low target range of 0.0% to 0.25%. The week will culminate with the highly anticipated set of employment data, namely the NFP on Friday, which could very well dictate the tenor of the dollar’s trading patterns heading into Q1 of the New Year. Three months ago, the primary concern for traders from all asset classes was risk aversion fed by a liquidity crunch, a global recession, and tumbling interest rates.
Such concerns are not likely to fade into H1’09, but the dollar’s ability to capitalize on them likely will. With risk seen as a global force and investors scrambling to protect their capital base (rather than search for returns), flows turned to the deep liquidity and safe harbor of US treasuries. Looking forward, such a deep-seated plunge in investor confidence is not likely to swell up again considering the cumulative efforts made by global policy makers to stabilize the markets and guarantee liquidity. However, what is likely to continue is the drop in yields and slump in economic growth. Without a unifying quality—like a currency’s safe haven status—the dollar will be left to the pervasive perception that it is leading the global recession, and will lose its allure given that yields are practically at zero.

EUR – The euro begins the New Year at 3-week lows vs. the dollar, amid broad dollar strength and prospects for further Eurozone rate cuts. The single currency slid to lows below $1.3600 after rising to peaks above $1.46 last week in holiday-thinned trading. Comments by ECB Vice President Papademos that more rate cuts may be needed suggested that the ECB may cut as aggressively as the US to counteract the recession in the Region. The EUR received some solace from news that E-16 investor sentiment improved for the first time in 7-months, raising optimism that the worst of the crisis has passed. The Eurozone Sentix Index was reported at -34.4 from -42.30 previously. The euro is likely to have difficulty extending gains until signs of a sustained recovery are underway.

JPY – The yen slipped to near four-week lows against the dollar on Monday amid improved risk appetite, with bargain prices and hopes for a global economic recovery this year prompting a 2% gain on the Nikkei share average index. JPY had surged 19% vs. the USD last year as investors sold all risky assets financed with the currency's cheap rates. The yen skyrocketed to near 87.0 against the dollar in volatile trading last month—its highest level in more than 13 years—as the financial crisis prompted investors to flee from riskier assets.
The yen may likely be driven higher as trading volumes regain pre-holiday levels and year-end capital flows begin to reverse their direction.

GBP – The pound sterling slid against the euro and touched the lowest level in almost seven years against the USD on speculation the recession in the UK will deepen. The pound opens the week at $1.4538 after economic data released on Friday showed that UK mortgage approvals for November dropped to their lowest level since 1999 (27K loans funded vs. 31K prior). Manufacturing also contracted in December prompting the BoE to likely cut the benchmark interest rate to 1.5% on Jan. 8—the lowest level in the Bank’s three-century history. Furthermore, BoE Governor King may follow the US Fed and pursue other ways of pumping money into the British economy, such as expanding the GBP 200B program that allows banks to swap illiquid securities for government debt.

CAD – Canada’s currency fell in excess of 18% last year and is expected to extend those losses into 2009 as tumbling crude prices hobble foreign investment in the country’s oil patch—the largest outside of Saudi Arabia—which generates half of the country’s exports.
Canada’s Current Account surplus, the broadest measure of trade, will likely turn into a deficit in 2009 as commodity investment and revenues continue to fall. Median forecasts for the loonie in Q1 of 2009 are expected to top C$1.28 vs. USD with a year end projection above the C$1.30 level.

MXN – The peso continues its struggle that began last August when credit markets collapsed, remittances dwindled, and fears of declining exports to the US led a 37% decline in the currency’s value. The New Year has not improved the picture for the MXN as the US, the largest consumer of Mexican exports, slips further into recession. Crude oil, Mexico’s largest export, and 1/3 of its fiscal budget, has hampered the economy as well with prices hovering around the $40-$50/bbl mark. Continued efforts by the Central Bank to prop up the currency through buying peso (15.2 B to date), have done little to alleviate the blood-letting. In fact, the Peso finished 2009 as the worst performer against the USD.

CNY – The yuan is lower vs. the dollar at 6.8367, falling amid broad dollar strength, snapping 5 consecutive days of rises for the Chinese currency. CNY stability appears to be the theme, per PBoC statements.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Jan 7 2009, 09:10 GMT