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Weekly Update

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The Chinese yuan is lower vs. the dollar at 6.8303

Wed, Nov 19 2008, 09:29 GMT
by Union Bank of California Team

Union Bank of California

USD -- America’s currency continued to benefit from the recent trend of “safe-haven” flows as uncertainty in the global economic landscape and volatility in the equity markets left market participants skittish and risk averse. Notwithstanding fundamentally bearish economic news emanating from the US last week and this morning, the greenback continues to remain underpinned, trading at multi-year highs against most of its major world counterparts, save the JPY. Initial jobless claims rose to record highs last week, skyrocketing from the previous week’s reading (516K for wk. of 11/8 vs. 481K prior). The deplorable unemployment data set the stage for an even more shocking Advance Retail Sales Index (-2.8% in Oct.—the worst reading on record). Finally, capping the week was a dismal reading of the University of Michigan Consumer Confidence Survey (57.9 in Nov.). The Empire Manufacturing Index this morning (-25.43 in Nov. vs. -24.62 prior) further cemented the ostensible notion that the economic crisis is far from being over. Markets will once again have plenty to digest this week as key inflation and housing data, together with the minutes of last month’s FOMC meeting will prominently take center stage. Since risk trends have been the primary driver of currency price action lately, US stock markets may be a key gauge for the dollar’s direction—a pessimistic turn in economic sentiment could lead equities lower, and hence lead the USD higher, given their strong inverse correlation, especially as of late. Fed Funds futures are now pricing-in a 100% chance of a 25-bps rate reduction on 12/16, and a 75% chance of a 50-bps rate.

EUR -- The euro begins the week on weak footing following the conclusion of a weekend meeting of the G20. The single currency which has been among the hardest hit of major currencies fell to lows below $1.24 last week as the Euro Zone slipped into recession after Q3 GDP fell -0.2%. The negative growth in Q3 marks the second consecutive quarter of negative growth in the Euro Zone making the region the first to slide into recession.
Conditions in the region will remain challenging into 2009 with further interest rate cuts likely per comments by ECB member Axel Weber. The central bank cut rates by 0.50% to 3.25% last week, bringing interest rates down a full percentage since October. With the economic conditions remaining weak, the ECB is expected to cut rates another -0.50% in December. The poor economic outlook for the region is likely to translate into continuing weakness for the euro.

JPY -- The yen rose on Monday after a short-lived slide overnight on the report that the world's second-largest economy slid into its first recession in seven years. The 0.1% contraction in Jul.-Sep. GDP came amid a slump in exports and some analysts said an escalation in the global financial crisis may have put the economy on course for its longest-ever contraction. The Q3 GDP figure translated into an annualized contraction of 0.4% vs. a revised -0.9% for Q2—the biggest drop in seven years. BoJ Deputy Governor Nishimura warned that the market turmoil may not be over and the Economy Minister forewarned of increasingly tough times ahead. Japan’s longest economic expansion since WWII ended after defaults on US mortgages triggered a global credit squeeze last year. Economists are divided over whether the BoJ will cut rates even further, with some forecasting a return to Japan's policy of zero interest rates.

GBP -- Over the weekend UK PM Brown urged the opposition Conservative Party to be “responsible” in commenting on currencies after it warned the government runs the risk of triggering a “collapse” in the GBP. Sterling has lost more than a quarter of its value in four months, declining to less than $1.50 last week from more than $2 in July. Comments from the Bank of England that it intends to do all that is necessary to get the UK economy back on track saw the GBP tumble against other majors last week. The pound is expected to remain under pressure, with this week’s round of UK data releases likely to reinforce the view that the rate-setting MPC will cut rates aggressively again in December.

CAD -- The loonie experienced a roller coaster ride last week falling-off the previous week’s rally (1.1658 vs. USD) as crude oil and equity performance worsened. Canada decreased its USD reserves last week by as much as $720M in an attempt to shore-up the currency.
Economists are now sounding the recession bell for the Canadian economy predicting rising unemployment (highest since 2004), a 1.2% annualized pace of contraction for Q4’08, and a 0.5% rate in Q1’09.

MXN -- The peso continued its recent trend of weakness last week moving to as high as 13.05 vs. the USD. Falling crude oil prices, Mexico’s largest export product, coupled with losses in US stocks trimmed demand for higher-yielding, emerging-market assets. Demand for pesos also weakened after Fitch Ratings lowered the government's debt-rating outlook to negative from stable on concerns of a slumping US economy and reduced capital flows.
Mexico’s fiscal budget is largely based on anticipated revenues from crude oil sales, which have seen a 62% drop in market price since July. The peso had a brief respite last week as global stocks gained on news of China's $586B plan which sparked demand for higher-yielding securities. This was, however, short-lived.

CNY -- The Chinese yuan is lower vs. the dollar at 6.8303. Markets are forecasting the yuan to fall 1.72% in 12-ms. per the forwards market as the Chinese economy slows in line with global economic conditions.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Nov 19 2008, 09:37 GMT