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Weekly Update

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The yuan is trading at 6.8365 vs. the dollar this morning

Wed, Feb 18 2009, 09:55 GMT
by Union Bank of California Team

Union Bank of California

USD – With US financial markets back in session from the Presidents’ Day public holiday yesterday, the US dollar rose across the board on Tuesday, fed by gloom over the global economic outlook. This drove the currency’s trade-weighted index close to a three-month high as investors sought the relative safety of the greenback. Aiding the dollar’s ascent last week was a report that the Obama administration will unveil tomorrow a broad plan to assist homeowners struggling with mortgages to stem record home foreclosures and arrest the rapid erosion in housing values. Meanwhile, President Obama will formally sign the $787B economic stimulus bill into law today designed to resuscitate the moribund US economy.
The dollar had little reaction to data showing the New York Fed’s Empire State manufacturing production fell to a record low in February. Also, a Treasury Dept. report showed net capital inflows into the US rose to $74B in December from a revised inflow of $61.3B in November.
Retail Sales unexpectedly rose (1.0%) for the first time in seven months during January, but the index is still down 9% from one year earlier. Initial jobless claims reported last week fell slightly to 623K from 631K, but is still near the highest since 1982. The Univ. of Michigan’s consumer confidence index fell more than expected in February (56.2 vs. 61.2 prior)—near 28-year lows—as expectations for the future of the economy remain dour.

EUR – The euro is at a two-and-a-half month low against the dollar after Moody’s credit ratings agency threatened to downgrade European banks that have heavy exposure to Eastern Europe. The euro hit a low of 1.2575 against the dollar. The euro got a brief boost from data reporting an increase in the German ZEW sentiment survey in January (-5.8 vs. -31.0 prior). The currency has been hit by risk aversion as investors flocked to the safe-haven dollar. Last week, the ECB left interest rates unchanged at 2%, with expectations of cuts in March. Data showed that Eurozone industrial output fell 12% in December, and that the GDP shrank 1.5% from the previous quarter. The E-16’s largest economy, Germany, fell a bigger-than-expected 2.1%, highlighting the weakness of the region’s economy.

JPY – The yen continued its slide against the dollar on Tuesday after data showed Japan’s economy spiraled steeply lower by -3.3% in Q4 (vs. -3.1% exp.) after a downwardly revised -0.6% contraction in Q3—the worst quarterly performance since Q1 1974. More disturbingly, the economy plunged by a whopping -12.7% (vs. -11.7% exp.) on an annualized basis after a -2.3% fall for the prior period. External demand proved the main drag due to an unprecedented fall in exports amid the intensifying global crisis. Further adding to injury, Finance Minister Nakagawa resigned on Tuesday after being forced to deny he was drunk at a G7 news conference in Rome over the weekend. PM Aso appointed Kaoru Yosano as the replacement, who will keep his current post as economic minister. At his first news conference on Tuesday, Yosano said he would focus on ensuring a smooth financial system as well as stimulating demand in the economy.

GBP – Despite a BoE rate cut to a record low of 1% and a previous two-week rally, sterling fell for most of last week as grim data continues to reaffirm that Britain is in a deep recession.
The BoE’s quarterly inflation report forecasted inflation well below the 2% target for the next 3 years and UK unemployment rose to the highest level since 1998 to 6.3% in December. BoE Governor King said on Wednesday that measures to revive UK lending may not work and was ready to pursue unconventional steps such as quantitative easing to revive the economy. This morning, sterling regained much of last weeks losses as the Office for National Statistics reported that consumer prices fell 0.7% in January, pushing the annual rate down to 3.0% and above original forecasts for a rate of 2.7% and the BoE's 2% target.

CAD – The loonie followed a somewhat choppy path last week to end in negative territory giving up a little over 2% vs. the greenback. Lower crude oil and natural gas prices continue to plague the currency as exports and general economic growth remain slow. Canadian housing starts fell to the lowest since 2001 as work on urban single-family dwellings plunged to its weakest level since 1996. New home starts fell 11% in January to 153.5K units on an annualized basis—the fifth straight decline according to the Canada Mortgage and Housing Corp.

MXN – The peso remained under pressure last week (low 14.5585 vs. USD) as decreasing exports, crude oil prices, flight from emerging market investments and criminal issues linked to increased drug cartel violence reek havoc on the Mexican economy. President Calderon said he will send proposals to Congress to change laws governing the social security system and the public housing agency in a bid to mitigate the impact of the global economic crisis. Exports fell across the board as imports rose for the periods of July – Dec. of 2008, according to a survey by the National Institute of Statistics. Expect the Peso to remain under pressure with possible central bank intervention to prevent further declines in the currency.

CNY – The yuan is trading at 6.8365 vs. the dollar this morning. The Chinese government has kept the currency stable during the global financial crisis, as any weakness could prompt capital outflows. A senior economic planning official was quoted as saying the yuan could weaken to about 6.95 to 7.0 per dollar.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Feb 18 2009, 12:16 GMT