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Weekly Update

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This morning the USD rose to the highest level against the euro in almost seven months

Wed, Sep 3 2008, 06:48 GMT
by Union Bank of California Team

Union Bank of California

USD -- This morning the USD rose to the highest level against the euro in almost seven months as oil plunged and Federal Reserve rate cuts raised speculation that the US economy will outperform Europe and Asia. The revised figures for Q2 GDP growth clearly underlined that it is the export sector that is propping up the US economy. Export growth was revised up from 9.2% to 13.2% q/q, while import growth was revised down from -6.6% to -7.6% q/q. Thus, net exports contributed no less than 3.1% of the total growth of 3.3% for Q2. This strong export growth is reflected in relatively buoyant new orders in spite of sluggish business investment in the US. A stronger USD and a weaker global growth picture will put a damper on export growth going forward, but it typically takes time for changes of this nature to feed through completely. Therefore, the ISM report for the manufacturing sector is expected to continue to show that the sector is keeping its head above water. This week’s economic releases include the Fed’s Beige Book on Wednesday and closes with the employment report on Friday, which is expected to show the jobs market is still weak.

EUR -- The euro is at 7-month lows as the dollar rally continues amid a broad pullback in energy prices. Euro fell below 1.45 as oil prices continued to ease below $109 a barrel. The Eurozone also continues to show signs of moderation. The business climate index fell to -0.33 while consumer sentiment fell to -19. Economic and industrial were also reported below forecast at 88.8 and -10, respectively. Inflation eased to 3.8% in August and unemployment remained steady at 7.3%. Markets are awaiting Thursday’s ECB policy meeting at which the ECB is expected to keep rates unchanged at 4.25%. Falling oil prices are expected to reduce inflation pressures, cooling the interest rate outlook and contributing to further euro weakness.

JPY -- The yen saw mostly range-bound trading last week with the exception of a 1.7% move against USD on Friday reaching a low of 108.65. For the second time in a year, a struggling Japanese Prime Minister has unexpectedly quit, leaving the country politically adrift as it struggles to deal with a deadlocked Parliament and a worsening economy. The Liberal Democratic Party reached out to Fukuda just a year ago after Shinzo Abe, his much-heralded predecessor, threw in the towel after a year of dismal leadership. Taro Aso, the LDP's Secretary-General is expected to succeed Fukuda. An $18B stimulus package introduced last week in an attempt to shore up the lagging economy has been dismissed by most market analysts as ineffectual. The world’s second largest economy in confronted with many issues including escalating inflation, reduced consumer consumption and a shaky pension system that faces an aging population and shrinking work force. Expect the yen to react to near-term USD strength and uncertainty of leadership.

GBP -- Sterling continued its bleak course last week loosing nearly 2.6% vs. USD to reach a low of 1.8365, sparking its steepest slide in over two years. The pound dropped against the euro and the dollar last week after a government report showed economic growth stagnated in Q2. The report added pressure on the Bank of England to set aside concerns about inflation and to cut its benchmark interest rate, currently at 5%, to stimulate the lagging economy. The UK economy faltered earlier this year after banks choked off credit following the collapse of the US subprime mortgage market. UK house prices posted the biggest annual decline in almost two decades in August. Still, an inflation rate at more than twice its 2% target has prevented the BoE from lowering rates to revive the economy. Expect sterling to remain under pressure as the BoE contemplates its options.

CAD -- The Canadian dollar dropped to its lowest level against the greenback in more than a year today given the sharp drop in oil prices by more than $7 a barrel after Hurricane Gustav faded and spared major Gulf of Mexico oil facilities. The economy was nearly in a recession in Q2 as data last week showed GDP grew 0.3% after shrinking 0.8% in Q1. A majority of analysts expect the BoC to keep its key overnight rate unchanged when the Central Bank meets tomorrow, but most feel the next move will likely be a cut.

MXN -- The Mexican peso suffered its fourth consecutive day of losses as the USD surged on comments by the Bank of Mexico’s chief. Guillermo Ortiz stated that Mexico is seeing the recent inflation spike in food and energy diminishing; causing speculation the Central Bank could lower rates early next year.

CNY -- The Chinese yuan is slightly lower at 6.8359 amid the global dollar rally. Markets are paring back expectations for yuan appreciation to a modest 1.24% over the next 12 months as the Chinese economy and inflation show signs of slowing.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Sep 3 2008, 06:53 GMT