America's currency, together with US Treasuries, soared throughout last week and this morning

USD -- America’s currency, together with US Treasuries, soared throughout last week and this morning, as deleveraging—the action of reducing borrowings for over-leveraged investments—led funds to flow away from global stocks, commodities, and “carry trades”, into what are perceived to be safe-haven assets. The USD (and especially the JPY) have been the strongest beneficiaries of these “flight-to-quality” trade flows during the past several weeks. With much of the global economic community already convinced that the US is now mired in recession, recent sanguine data indicators have produced a faint ray of hope that the worst may finally be behind. Last week’s Leading Indicators (0.3% in Sep. vs. -0.5% prior) together with the coupling of ameliorating housing data: Existing Home Sales (5.18M in Sep. vs. 4.91M prior) and this morning’s New Home Sales (464K in Sep. vs. 450K exp.) added fuel to the greenback’s already aggressive rally. Also, while OPEC announced that it would cut production by 1.5 million barrels, the deleveraging trend overpowered the news, sending crude down ~4.5% last Friday. This week is chock-full of significant market-moving data—all of which could potentially put the dollar at risk of decline. Tomorrow’s consumer confidence and manufacturing indices are expected to be the initial harbingers of negative US sentiment. However, Wednesday’s FOMC interest rate announcement will unequivocally be the week’s headline event, garnering full market attention. Team Bernanke is widely expected to deliver a 50-bps rate reduction, though Fed Fund Futures as of last Friday even suggested a 32% chance of a 75-bps reduction. GDP and jobs data will round-out the week as markets frantically attempt to find a bottom for what has arguably been the most tumultuous shake-up for financial markets in modern world history.

EUR -- The euro fell to 2-½ year lows vs. the dollar at 1.2335 amid fears of global recession.
The single currency has fallen nearly 10 cents since last week’s highs above $1.3400 as investors unwind risky bets across currencies. Adding to the euro’s gloom is an increasingly bleak outlook for the Eurozone, which may already be in recession. Industrial new orders fell -1.2% in August while PMI, a business sentiment index, fell further into contraction territory. Business expectations in Germany—the E-15’s largest economy—fell to 90.2, the lowest reading since the country was unified. With Eurozone conditions pointing towards recession, euro weakness will persist especially as expectation for rate cuts rise.

JPY -- The yen rallied on Monday as plunging stock markets and fears of global recession prompted investors to abandon risky trades and seek shelter in the safe-haven currency, which hovered near 13-year peaks against the dollar. Over the weekend, G7 officials released a statement on concerns about excessive volatility in the currency. Newly-seated Prime Minister Aso said the government would expand a plan to give lenders access to public money, and he urged the state to buy shares directly from banks to reduce their market exposure. Although Japanese banks have had little exposure to the risky credit instruments that crippled Wall Street, investors now fear these lenders' extensive shareholdings and rising bad-loan costs will unravel corporate profits this year. The Nikkei stock index average closed down 6.4% on Monday touching a 26-year low.

GBP -- Battered by risk aversion, recession fears and talk that the BoE may slash interest rates further, sterling continued its fall this morning against the dollar, after reaching a 6-year low of $1.5265 on Friday. Prime Minister Brown added to the currency's woes as he said falling inflation will give monetary authorities around the world room for more coordinated interest rate cuts in borrowing costs. The steep falls in the sterling/dollar pair mean a break below the $1.50-level “cannot be ruled out”, he added. The BoE cut rates earlier this month and most expect it will be forced to slash aggressively in an attempt to stave-off a prolonged and painful recession. Last week’s data showed the economy contracted by 0.5% in Q3 and manufacturing falling 1.0% q/q. Emphasizing the weakness in the housing market, house prices in England and Wales fell 7.3%.

CAD -- The loonie continued its correlation with crude oil last week moving as high as 1.2775 vs. USD. Canadian wholesale figures in August fell for the first time in six months as shipments of motor vehicles plunged, adding to evidence that growth in the world's eighth-largest economy is slowing. Counter to slowing growth the BoC cut its over-night lending rate last Tuesday by 25-bps to 2.25%, reflecting the US recessionary slip on the Canadian economy. Slowing exports of Canadian goods coupled with a 56% drop in crude oil prices (since the all-time high of $145.29 set on July 3rd of this year) are taking their tolls. However, Canada's economy and strong financial system will likely benefit directly from the G7 economies’ coordinated plans for resuming the flow of credit.

MXN -- The peso saw yet another week of meteoric losses giving up over 7% vs. USD for a weekly session high of 13.8790. Deepening fears over the US recession and dwindling crude oil prices are two main factors thwarting even major central bank interventions. The peso has dropped 17.8% against the dollar in the past month and has declined against 15 of the 16 most-traded currencies. Last Tuesday Mexico's Senate approved a package of legislation including the income portion of the 2009 budget, which assumes the price of oil exports will average $70/bbl, and forecasts the USD/MXN exchange rate at 11.70.

CNY -- The yuan is lower vs. the dollar at 6.8523, down from Friday’s close at 6.8433.
Markets are projecting that the yuan’s uptrend vs. the dollar may stall heading into next year.

Last Week’s Currency Highs and Lows and Forecast