The loonie began last week at a four-year low reaching 1.2952 vs. USD

USD -- The greenback continued to be the beneficiary of “safe-haven” flows throughout most of last week, though the dollar gave up some of its gains this morning, as evidence of increased bank lending reduced demand for the currency as a haven. Three-month LIBOR slid 0.17% to 2.86%—the lowest level since the failure of Lehman Bros. on September 15.
Lackluster US economic data, notwithstanding, the greenback managed to remain well-supported amid global fundamentals favoring the USD on a relative basis. The Consumer Confidence Index fell sharply (38.0 in Oct. vs. 59.8 prior), while the advance Q3 GDP reading registered its first official contraction since 1991 (-3.1% vs. 1.2% prior). Meanwhile, a marginal uptick in the Durable Goods Order Index (0.8% in Sep. vs. -4.5% prior), together with a rising New Home Sales Index (464K in Sep. vs. 460K prior) offered a faint ray of hope that the worst may finally be behind. Last Wednesday, the FOMC delivered a much-anticipated 50-bps rate reduction in the Fed Funds rate to 1.00%; current interest rate futures are fully pricing-in another 25-bps easing on December 16. This morning’s deplorable ISM Manufacturing Index (38.9 in Oct. vs. 43.5 prior) together with the accompanying ISM Prices Paid Index—a measure of inflation—declined yet again (37.0 in Oct. vs. 53.5 prior), which will likely exacerbate sentiment for further monetary easing.
Several key economic indicators will help offer a directional guide for the dollar this week (i.e., Friday’s NFP reading and the accompanying official Unemployment Rate announcement—both of which are expected to disappoint). Nevertheless, if economic data from other regions such as the UK and Eurozone prove to be more fundamentally bearish, or if global risk aversion strikes again, the USD could gain on reignited “safe-haven” flows.

EUR -- The euro stabilized after an easing of risk aversion and Eurozone recession concerns sent the single currency plummeting vs. the dollar. The single currency is up over 4 cents from last week’s lows of $1.2332 following an easing of extreme volatility which resulted in a virtual freeze in interbank lending. Despite the thaw in credit conditions, which was supported by last week’s 0.50% Fed rate cut, many challenges remain for the euro. E-15 GDP fell -0.2% in Q2 and the outlook calls for further contraction in Q3, sending the region into recession. Last week saw bleak data from a wide cross-section of the economy with consumer, economic, industrial and services sentiments all below forecast. Unemployment also remains stubbornly high at 7.5%. The ECB is expected to cut rates by 0.50% to 3.25% at this Thursday’s monetary policy meeting.

JPY -- With markets in Japan closed for a national holiday today, the yen retreated broadly as rising Asian and European equities helped to dampen extreme risk aversion—a temporary break from the unwinding of the yen “carry-trade” and flow of capital to safe-haven Japan.
The near 800-point reversal in the currency from more than a week ago (high of 90.90 vs. USD) illustrates the yen’s volatility rather than its actual direction. But as investors gingerly returned to riskier assets, gains were tempered by concerns about a possible prolonged global recession, which kept overall support for the low-yielding JPY intact. Additionally, the market disregarded the Central Bank’s 20-bps interest rate cut to 0.30% last Friday. BoJ Governor Shirakawa commented there has been a clear change in export and production trends due to the yen’s strength, and that the rate decrease was meant to keep conditions “accommodative.”

GBP -- Sterling fell against the dollar on Monday, reversing earlier gains as risk aversion returned to dominate sentiment, sending European equities lower. Despite the lower GBP, the currency was able to make an impressive 9.2% recovery from recent 6-year lows against USD. Thin liquidity exacerbated downward moves as investors grew wary about the likely impact of an expected rate cut decision from the BoE. Technical factors point to continued GBP declines and expectations for deterioration in the UK economy pose a threat to the currency. The BoE is expected to cut rates this week, with borrowing costs seen falling by a half point to 4%; however, speculation was building on the prospect of the Central Bank opting for a full-percentage cut to 3.5%. On the data front, Britain's manufacturing sector contracted for a sixth consecutive month in October as falling demand both at home and abroad tipped the sector into recession.

CAD -- The loonie began last week at a four-year low reaching 1.2952 vs. USD, only to fall back to 1.2125 to finish the week’s session. Crude continues as the main driver behind CAD weakness hitting a yearly low of $63.22/bbl. However, with US consumer confidence still weak the soft dollar may not provide the desired boost to Canadian exports. The BoC bought C$490M of securities for one day last Tuesday in an attempt to keep overnight lending rates close to its current target of 2.25%.

MXN -- The peso saw some relief from ramped selling as it began last week just below the 5-year low at 13.5222 vs. USD. Banco de Mexico has gone to exhaustive lengths of late to control the peso’s free-fall by selling nearly $8.5B in currency reserves (15% of total reserves) to date. In addition, the Central Bank will offer a 50B peso program of interest-rate swaps for Mexican companies to help them obtain more flexible short-term rates for longer-term debts and payments.

CNY -- The yuan is stable at 6.8281, and is expected to remain in a narrow range as speculation mounts that Chinese authorities are hesitant about yuan strength amid recent stock market losses.

Last Week’s Currency Highs and Lows and Forecast