The peso began last week at a three-week low of 12.25 vs. USD

USD -- America’s currency ended another tumultuous week of trading surprisingly unchanged from the week prior, as lingering risk aversion in the markets left “safe-haven flows” supportive of the greenback. Consequently, last week’s string of less-than-encouraging US economic data did little to impact the dollar’s levels. Advance Retail Sales (-1.2% in Sep. vs. -0.3% prior) and the Empire Manufacturing Index (-24.6 in Oct. vs. -7.4 prior) revealed an undeniable slow-down in economic activity, while the PPI (-0.4% in Sep. vs. +0.2% prior) coupled with the CPI (0.0% in Sep. vs. 0.1% exp.) confirmed a veritable abatement of inflation. The flow of lackluster data culminated with a deplorable triad of key indicators: Industrial Production Index (-2.8% in Sep. vs. -0.8% exp.), Philadelphia Fed Index (-37.5 in Oct. vs. +3.8 prior), and the University of Michigan Consumer Confidence Survey (57.5 in Oct. vs. 70.3 prior). The world’s largest economy is unequivocally at risk of recession, as can be further evidenced by Fed Fund futures now pricing-in as much as a 50-bps rate cut on October 29. Under normal circumstances, an interest rate cut would signal USD weakness; however, with risk trends remaining the primary driver of market movements, “safe-haven flows” have continued to underpin the greenback. This morning’s sanguine Leading Indicators Index (0.3% in Sep. vs. -0.5% prior) did little to produce market reaction, as market participants remain cautiously tuned-in to Fed Chairman Bernanke’s testimony on the state the US economy, which began at 10:00AM EDT. Given the jittery nature of the financial markets, Bernanke’s comments are likely to serve as a catalyst for additional volatility.

EUR -- Euro weakness vs. the dollar continues as market attention turns to the threat of global recession. The single currency fell to lows of $1.3287 today despite an easing of the turmoil plaguing financial markets in recent weeks. Instead, markets are beginning to focus on a potential global recession, which appears to have taken hold in the Eurozone. Germany, the Eurozone’s largest economy, likely stagnated in Q3 according to the Bundesbank. The Central Bank added that despite the stagnant growth, the economy would avoid a recession this year after contracting 0.5% in Q2. French economic ministers have also commented that France may need to revise economic growth forecasts downward. The French economy contracted 0.3% in Q2, and is expected to show negative growth in Q3 indicating that the Eurozone’s second largest economy is in recession.

JPY -- The yen is trading in a narrow range against the USD this morning amid Bernanke's Congressional testimony. Earlier, the yen was weaker as panic that has gripped financial markets for more than a month showed signs of diminishing. However, analysts say the low-yield currency could quickly return to its “safe-haven” status as financial markets remain fragile on the back of economies teetering on the verge of recession. Economy Minister Yosano remarked that Japan's economic downturn is “becoming clearer”, although falling oil and commodity prices will help with growth. Meanwhile, Japan’s Tertiary Index and nationwide department store sales fell (-1.4% in Aug. and -4.7% in Oct., respectively). The data raise speculation that the world’s second largest economy may fall into a recession by year-end.

GBP -- The sterling opened this week almost unchanged from Friday’s close at 1.7310 against the USD only to reverse its gains (currently trading at the 1.7150 level). The currency tumbled when Britain posted its biggest 6-month budget deficit—GBP 37.6B ($65B)—since World War II as the slide into recession hurt tax receipts and government spending jumped.
During Friday’s session, however, it traded in a relatively wide range bouncing from support at 1.7225 and resistance at 1.7380. Market sentiment received a boost in early London trade by talk the UK government will increase spending on public projects such as housing, energy and small businesses, as well as bring forward construction projects on schools and hospitals.

CAD -- The loonie saw its sharpest decline vs. USD in three years (1.1915 last Wednesday) as crude prices continued to fall ($69.85/bbl last Thursday) on reduced demand and near-term demand projections resulting from a lagging global economy. Canada's two-year bond dropped the most in two weeks as stocks surged on speculation that the US government’s $250B capital infusion into major US banks will restore confidence to world financial markets. Newly elected Prime Minister Stephen Harper, whose Conservative Party won a second straight minority government in last week’s election, said he'll work with opposition parties to help the economy during a period of “great uncertainty”. Gold also rose from its lowest level in a month ($835.50/oz.) giving a small boost to the CAD.

MXN -- The peso began last week at a three-week low of 12.25 vs. USD, but it was not to last long. The remainder of the week saw sharp declines as high as 13.14 vs. USD. Fears persist over a US economic slowdown, and its devastating effects on exports of manufactured goods (80% bound for the US). Continued declines in crude oil—Mexico’s largest export good—also hindered the currency. Even record injections of USD currency reserves by Banco de Mexico culminating in a total of $8.5B offered only a brief respite. With core inflation in Mexico still running well above 5% the Central Bank may have little choice but to continue it monetary tightening policy. Last week, policy makers proposed a federal budget for 2009 that proposes a fiscal deficit of 1.8% of gross domestic product—the first shortfall in four years and the largest since 1990.

CNY -- The yuan rose to 6.8299 vs. the USD despite a fall in China’s GDP: Q3 GDP slipped to 9% (10.1% in Q2). CNY is expected to be range-bound as markets await Chinese government stimulus measures.

Last Week’s Currency Highs and Lows and Forecast