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Weekly Update

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The yuan is weaker vs. the dollar at 6.8431

Wed, Oct 1 2008, 11:53 GMT
by Union Bank of California Team

Union Bank of California

USD -- Volatility in the currency markets dominated once again last week, though clear direction in currency movements was notably absent. However, looking at the mounting fundamental pressure behind the ongoing financial crisis—and expectations for a Fed interest rate cut that have been laid bare by this uncertainty—the potential for significant market swings amongst the major traded currencies is quite material. The latest in the seemingly interminable saga to the credit debacle was last week’s failure of Washington Mutual Bank and this morning’s announced acquisition of Wachovia Bank by Citigroup.
Markets have been waiting with bated breath for the announcement of an agreement to the proposed $700B Treasury “bailout plan” designed to get the credit markets flowing again. US policymakers reached a bipartisan agreement yesterday, and Congress will officially vote on the measure later today. The breakdown of the proposed bill revealed that $250B would be available immediately for the Treasury to absorb “toxic mortgage debt”, while another $100B will be at the President’s discretion, and the remaining $350B will be subject for review by a governing body comprised of Congress members. The dismal data releases last week helped to exacerbate the dollar’s overall bearish sentiment: Durable Goods Orders Index (-4.5% in Aug. vs. 1.3% prior); New Home Sales Index (460K in Aug. vs. 515K prior); Q2’08 GDP F (2.8% vs. 3.3% prior); consumer confidence (70.3 in Sep. vs. 73.1 prior). Many market participants had believed the US economy was heading for a recession even before this fundamental stress from the financial crisis was added into the mix. The dour economic climate of the US, together with the meltdown in the financial and credit sectors have now boosted the probability of interest rate cuts—dramatically. Fed Fund Futures are fully pricing-in a 25-bps rate cut for the 10/29 FOMC meeting, with a 32% chance of a 50-bps cut. While the financial crisis and rate expectations will be two overwhelming influences on the USD for some time to come, the economic calendar this week will offer more of a regiment to event risk. Topping the list of indicators due for release is September NFP report, which is expected to result in the 9th consecutive month of contraction for the labor sector.

EUR -- The euro tumbled vs. the dollar as the credit crisis gripping US financial institutions spread overseas to the Eurozone. The single currency fell to 10 day lows of 1.4301 following the coordinated rescue of insurer Fortis by Belgian, Dutch and Luxembourg governments who injected EUR 11.2 billion into the company. The news spooked markets and sent the euro lower on fears that the global credit crisis is spreading beyond the US. Iceland’s banking sector was also hit as the government took control of Glitnir, the nation’s third largest bank. Weakness in Eurozone financial institutions comes amid continuing signs of slowing growth in the region. E-15 PMI was reported at a below-forecast 47.0 in September. However, a 1% rise in industrial orders was some sign that the economy remains resilient.

JPY -- The yen began last week by relinquishing nearly 1% (1.0654) mid-week vs. USD before reversing some of those moves to gain back 0.5% at Friday’s close of 1.0601.
Concern over the US financial crisis had many “carry-trade” investors in a holding pattern. Nomura, Japan's biggest securities firm agreed last week to buy Lehman Brothers Holdings Inc.'s investment banking and equities unit in Europe. The purchase follows Nomura's $225 million takeover of Lehman's Asian-Pacific unit announced last Monday. Mitsubishi-UFJ, Japan's largest bank, purchased a 21% stake in Morgan Stanley for just over 900 billion Yen (~$8.5 billion). Expect yen strength as investors continue unwinding higher-yielding assets amidst a continuing slump in global equity markets.

GBP -- Sterling hovered near a one-month high of $1.8544 before declining 0.5% to close the week at $1.8445 last Friday. In an effort to provide liquidity to cash strapped UK bank’s, the BoE offered $40 billion in its fourth overnight dollar auction, and maintained its terms announced last Monday allowing financial institutions to make larger bids than in previous week's emergency sales. The UK economy continues to be hampered by similar conditions in the US (i.e., a stalling housing market, bank liquidity issues and falling crude oil prices).
British banks are proposing the government help bail them out of losses so they can resume lending.

CAD -- The loonie slipped against a firmer greenback this morning as concerned investors shifted their attention to Europe and commodity prices weakened on expectations that the financial turmoil would lead to softer demand. Concerns over the global economic outlook have put a dent in commodity prices with US crude oil down well over $5 to just above $101 a barrel. Analysts said weaker oil prices, along with month-end flows could weigh on the CAD over the next couple days, but do not expect the currency to fall sharply. Meanwhile, the BoC expanded its swap facility with the US Fed today to US$30B from US$10B in its part by global central banks to help seized-up money markets.

MXN -- The peso was hurt this morning over continued worries regarding the US credit crisis, and speculation that Mexico’s central bank may cut lending rates, falling to its lowest level in eight months. Recent trade balance numbers added to the concern as soft economic activity indicate a slowdown in exports to Mexico’s biggest market.

CNY -- The yuan is weaker vs. the dollar at 6.8431. Chinese markets are closed this week for the National Day holidays in China. Yuan appreciation has risen 6.5% in the first half of 2008.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Oct 1 2008, 12:06 GMT