• Home ::
• Technical ::
• Market View ::
• Weekly Update

• Send
• Print
• Add To
• Rss

Weekly Update

7e14b757-f32a-4ec0-9120-5476f5bc74d3

0

0

The Federal Reserve unexpectedly slashed interest rates by 0.75% today

Wed, Jan 23 2008, 05:58 GMT
by Union Bank of California Team

Union Bank of California

USD – The Federal Reserve unexpectedly slashed interest rates by 0.75% today in response to a global rout of equity markets yesterday. The inter-meeting move was the first since September 2001 and the largest single rate shift since 1994. The Fed’s action today comes amid deepening pessimism of a recession in the US which caused a plunge in European and Asian stock markets yesterday. The Fed move was to preempt a similar drop in US equity markets which were closed yesterday for the Martin Luther King Holiday. Despite the announcement, the Dow Jones plunged over 400 points at the open before recouping some of its losses. The Fed’s actions came after news of continuing mortgage related losses for banks last week. Both Merrill Lynch and Citigroup reported record quarterly losses and additional writedowns stemming from mortgage securities. The firms also announced additional capital infusions to shore up their balance sheets. Continuing woes at the nation’s largest banks amid slowing real estate market conditions also appeared to take its toll on consumer spending. News that retail sales fell 0.4% in December stoked concerns the economic slowdown was spreading to the consumer. In light of the uncertainty facing the US economy, the Fed is expected to follow today’s rate cut with additional rate easing at its meeting next week. In turn, the lower trajectory of US interest rates will place additional downward pressure on the USD.

EUR – The euro fell nearly 3 cents yesterday to below $1.44 vs. the dollar amid the sell-off in global equities which pushed European equities several percent lower. With Euro zone interest rates now above that of the US with today’s Fed move, the yield advantage favors additional euro strengthening.

JPY – The yen was uncontrollably dictated last week by the carry-trade. It opened the week with the only losses it would see manifested by Japanese companies paring their spending (machine orders declined 2.8% from October 07’) over speculation that a slow down in the US economy will hurt Asian exports in the coming months. The negative data continued with the lowest consumer confidence reading in almost 4 years. That, however, was not enough to stave off the flood of yen buyers attempting to diversify out of high-risk-high-yield carry-trades financed by yen. Expect the yen’s behavior to remain strong as carry positions are squared.

GBP – The pound began last week by falling to a near 10-month low vs. USD after an independent study showed the December UK housing market posted the worst month since the recession of 1992. The pound made a precipitous fall against all but two of the 16 most-active currencies trading to a 75.43 low against the euro and hitting a bottom of 1.9589 against the USD. However, as is common of late, the pound reversed fortunes Thursday reaching 74.63 against EUR and 1.9634 vs. USD. In contrast, the pound continues to suffer from speculative ‘over-selling’ as markets contemplate the risks to the UK economy as the BoE maintains the highest borrowing rates among the G7-nations. Expect the pound to continue this type of volatility near term.

CAD - The loonie rose slightly against the greenback on Tuesday after the Bank of Canada cut its benchmark interest rate by 25 bps to 4% this morning, meeting market expectations. The central bank said further cuts are likely to be needed to protect the economy from the worsening US housing crisis. The BoC emphasized the buoyancy of the economy, projecting that high commodity prices will continue to boost domestic demand.

MXN - The peso and equities firmed strongly early on Tuesday after the US Federal Reserve surprise rate cut this morning regaining most of the ground lost on Monday's session. Domestic markets plunged yesterday amid a global melt-down triggered by concerns of recession in the US, Mexico's main trade partner. The benchmark IPC stock index was up this morning compared to a steep 5.35% dive yesterday.

CNY – The yuan gave up early gains to end slightly lower at 7.2392 vs. the dollar on Tuesday as the central bank set a daily reference rate that was much lower than the previous day's close, in what may have been a response to the global market turmoil.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Jan 23 2008, 06:01 GMT