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Weekly Update

America's currency remained pressured throughout most of last week and this morning

Thu, Jul 17 2008, 11:59 GMT
by Union Bank of California Team

Union Bank of California

USD -- America’s currency remained pressured throughout most of last week and this morning, as the shocking revelation of the liquidity crisis facing Fannie Mae and Freddie Mac—the two largest US mortgage Government Sponsored Enterprises (GSE)—caught markets by surprise. Thankfully, the Fed’s quick action to restore confidence with the announcement that the GSEs can have access to its discount window—which would allow them to borrow money directly from the Federal Reserve rather than the open market—helped to forestall a crisis and assuage market jitters. Nevertheless, there exist persistent concerns that a bankruptcy of the two institutions could create a massive disruption in the financial system, sending yet more safe-haven capital flows out of the greenback to the EUR. Notwithstanding their sanguine showing, the economic data last week were eclipsed by the market-rattling news concerning the GSE’s: US Trade Balance (-$59.8B in May vs. -$62.5B exp.) and U. of Michigan Consumer Confidence Report (56.6 in Jul. vs. 56.4 prior). With the US economic calendar chock-full of key data releases this week (not the least of which are the closely watched housing data and minutes from the last FOMC meeting), markets will have plenty to digest. In addition, soaring oil prices and the fallout stemming from the GSE’s, will create a formula for the continuation of sharp market volatility in both the currency and equity markets.

EUR -- The euro rose to highs of 1.5970 last week as investors fretted about the health of the US financial sector. The single currency also gained as oil rose to new peaks above $147, placing additional downward pressure on the dollar. Euro gains have subsequently moderated with news of the rescue plan for the beleaguered mortgage giants FNMA and FHLMC. The euro’s strength presently appears due more to US economic uncertainty than broad-based Eurozone strength. Q1’08 GDP rose a modest 0.7%, bringing the annual rate to 2.1%. The near-term direction of the euro appears likely to be directed by dollar sentiment.

JPY -- The yen saw a boost in early trading last week as investors pared holdings of higher yielding “carry-trade” on speculation of a continued widening in mortgage industry loses. The risk reversal sparked yen buying to unwind those carry-trade positions that continued throughout last week. Tax increases on tobacco are being considered as a ‘first-strike’ move against inflation rather than the previously considered ‘consumption tax’ which would tax all goods and services within the country. These and other measures are being considered to help reduce the current account deficit of Japan—the world’s most indebted nation. Expect yen to remain responsive to the risk-averse sentiment in the market.

GBP -- Sterling opened last week on the decline against both EUR and USD, dropping 0.2% to £79.62 and $1.9718, respectively. Sales of services and manufactured goods in the U.K. fell in the second quarter, posing “serious risks” that the economy will tumble into a recession according the British Chambers of Commerce. An index based on a survey of 4,758 companies fell to -2.0 from 17.0—the lowest since 1992. Another index tracking UK factory output declined to a -3.0 reading from 12.0—the lowest level since 2001. UK stocks sank to the lowest since 2005, led by retailers and travel companies, as oil climbed above $147 a barrel, sending the FTSE 100 Index into a bear market. Expect the pound, however, to range around the $2.00 mark as concern wages over continued US mortgage issues.

CAD -- The CAD was blown back by disappointing Canadian employment numbers this past Friday. Tomorrow brings the Bank of Canada interest rate decision, where no change in rates is expected. The cumulative move in spreads over the past month still suggests that CAD should be at stronger levels against the USD. Even though the Canadian economy is slowing, it still looks much healthier than that of the US economy. However, as has ostensibly been the case in recent months, the Canadian currency often weakens in concert with its US counterpart; with the instability in the US financial sector, the latter currency looks set for renewed hardship.

MXN -- The interest rate differentials between the US and Mexico are expected to widen as Mexico’s central bank is likely to raise its benchmark interest rate to 8.00% on July 18th, after inflation climbed to 3-½ year highs of 5.26% in June. The result of these interest rate increases has boosted the peso by 5.9% against the dollar so far this year.

CNY --The Chinese yuan hit a fresh post-revaluation high of 6.8253 against the dollar last week. A story published in the Official China Securities Journal suggested that China may slow the pace of yuan appreciation in the second half of the year due to slowing export growth.

Last Week’s Currency Highs and Lows and Forecast

Published on  Thu, Jul 17 2008, 12:21 GMT

Archive

• This morning the USD rose to the highest level against the euro in almost seven months
  Published On Wed, Sep 3 2008, 06:48 GMT
• America's currency was back on the defensive again throughout most of last week
  Published On Tue, Aug 26 2008, 07:33 GMT
• America's currency extended its rally from the prior week
  Published On Tue, Aug 19 2008, 06:53 GMT
• Japan's currency continued a steady decline vs. USD on slowing domestic output
  Published On Tue, Aug 12 2008, 09:05 GMT
• Concerns of slowing growth in the Eurozone is putting pressure on the euro
  Published On Thu, Aug 7 2008, 07:51 GMT

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