As expected, the ECB rate-setting meeting resulted in a 50-bps cut in its key rate to 3.25%

USD -- Despite some ostensible easing in credit markets economic news in recent weeks has been dismal. There are clear signs that more or less all countries in the developed world will be in recession in 2009. This is evident from among other things the steep decline in recent PMI data. Given the Veterans Day holiday in the US tomorrow trading could get off to a slow start with financial markets looking to the weekend’s G-20 financial summit for direction. Along with comments from leading Federal Reserve officials, including Chairman Bernanke, there are a number of key data releases this week including the retail sales, trade and business inventory reports. The November Univ. of Michigan consumer confidence report will also be featured and, following last month’s record drop, is set to slip even further. The greenback has lost some of its shine in the latest trading sessions, but at the same time, along with the yen, should remain ahead of the euro and sterling due to the defensive qualities of the currency with repatriation flows being one of the strongest reasons at this juncture.

EUR -- As expected, the ECB rate-setting meeting resulted in a 50-bps cut in its key rate to 3.25%. The Central Bank also signaled that it is willing to further reduce as early as December. ECB President Trichet mentioned, for instance, that a 75-bps rate cut had been discussed, but the policy committee was unanimous in its decision to settle for 50-bps.
Speculation in the market expects the ECB will lower rates faster and more aggressively than anticipated. Among last week’s very weak economic data for the Eurozone was the final composite PMI, which showed a decline (43.6 in Sep. vs. 44.6 prior). Moreover, new orders in Germany have fallen sharply (8% m/m), partly because orders for export markets shed a massive 11.4% m/m. This week will be relatively light on economic data: on Tuesday the consensus for the German ZEW indicator is for a small increase to -62. Friday brings final HICP with expectations for a confirmation of the preliminary data, which showed an increase of 3.2% y/y, while core inflation will remain unchanged at 1.9% y/y.

JPY -- The yen fell broadly today as a rally in Asian shares was boosted by China's launch of a massive economic stimulus plan yesterday, which improved investors' appetite for risk.
The currency was also pressured by a slight easing in risk aversion and sharp gains in crude oil prices. The Nikkei 225 stock average closed 5.5% higher today after China's move heightened investor confidence, yet investors remained unwilling to take risks as they are worried about the depth of the economic slowdown. Analysts say the yen could bounce back unless global equities are able to find fresh factors to sustain them. Traders noted Japanese exporter demand was also likely to support the yen against the dollar at key levels such 100 yen. Meanwhile, machinery orders rose 5.5% m/m (-4.2% y/y) in Sep., well above the 5.0% m/m forecast. Last quarter, orders were down 10.4%—the largest drop on record.

GBP -- By cutting its benchmark rate by 150-bps from 4.5% to 3.0% last week, the BoE took an unprecedented step in fighting the economic slowdown. What was astonishing was the consensus was for a cut of 50-bps. Therefore, the Central Bank’s move was a surprise and indicates that global central banks are taking extraordinary measures to fight the worldwide slowdown. The BoE describes the financial crisis as the most serious disruption for almost a century with money and credit conditions having tightened sharply. With recessions in all neighboring countries and a credit crunch, which is providing an even harder landing for the housing market, inflation will decline sharply, hence, the focus will be on supporting the economy. Given the less-than-sanguine state of the UK economy market participants are expecting additional rate cuts over the next few months.

CAD -- The Canadian dollar rallied on the enormous stimulus package announced by China over the weekend, which had the effect of boosting currencies of countries that rely heavily on exporting their commodities. Hopes are that the large spending package will encourage more aggressive commodity buying by the middle of next year, especially oil and gold, from the world’s 4th largest economy.

MXN -- The peso strengthened this morning following news of China’s almost $600B plan as emerging market countries are optimistic this will limit the depth of the global recession. Mexico’s trade balance numbers will be announced later today which will reflect signs of contagion from the US downturn.

CNY -- The yuan range-traded and ended at 6.8258 today amid China’s announcement on Sunday of major initiatives worth nearly an astounding $600B to stimulate its slowing economy. Analysts said that the plan was unlikely to provide an immediate fix to the struggling global economy, while acknowledging that it was a step in the right direction, although they also expressed concern that China has had to take such drastic action to tackle the economic crisis.

Last Week’s Currency Highs and Lows and Forecast