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The single currency fell to 1−month lows ahead of the ECB meeting this Thursday

Wed, Jan 14 2009, 07:14 GMT
by Union Bank of California Team

Union Bank of California

USD – America’s currency once again undulated amidst choppy trading as market participants frantically sought insight into the health of the US economy and the direction of its currency. The greenback essentially rode the coattails of the equity markets as it responded in kind to the volatility of the major stock indices. The precipitous decline in the DJIA and the corresponding surge in JPY on the same day would seem to suggest that risk aversion continues to persist in financial markets. The major event risk last week was Friday’s NFP and unemployment data releases. US jobs fell by an alarming 524K in December, bringing the cumulative total of job losses in 2008 to 2.589M—the most since 1945. Furthermore, the headline unemployment rate surged to 7.2% from 6.8%, versus the 7.0% expected—a 16-year high. The data only confirm the already bleak outlook for growth going forward, as voiced by some key members of the FOMC, who see a “prolonged contraction”, as revealed in the minutes from the last monetary policy meeting.
Notwithstanding the abysmal data, the dollar managed to remain buoyed by demand as the interest rate dynamic (or lack thereof), with rates at historic lows (0% to 0.25%), is ostensibly keeping the greenback relatively underpinned. Markets will have plenty to digest this week with significant event risk on the calendar. Tomorrow’s scheduled speech by Fed Chairman Bernanke in London on the financial crisis and policy response, in particular, could prove to be one of the biggest market-movers of the week due to its potential impact on risk sentiment. Moreover, with inflationary data looking to be in negative territory for the first time since 1955, the specter of “deflation” could begin to rear its ugly head in the financial landscape of the world’s largest economy.

EUR – The single currency fell to 1-month lows ahead of the ECB meeting this Thursday.
The euro has steadily declined over $0.07 cents vs. the dollar in the past week as the Eurozone struggles with recession. The Region’s unemployment rate rose to 7.8% while industrial production fell -3.1% in November. News that retail sales rose +0.6% in October was overshadowed by PMI business sentiment indices coming in near the lowest readings on record. The ECB is expected to cut interest rates by 0.50% or more from current levels at 2%. Markets are pricing-in as much as a full percentage point cut on concerns that the ECB needs to ease rates more aggressively. Echoing these concerns, IMF Managing Director Strauss-Kahn today commented that Europe was “behind the curve” on stimulating the economy.

JPY – The yen climbed to a three-week high against the dollar on Monday, as a grim view on the global economy and a generally weaker tone in equities worldwide prompted investors to spurn riskier assets. Despite the national holiday in Japan today, the currency was stronger across-the-board as investors were still reacting to Friday's dismal US payroll data.
Disappointing outlook for Japanese economic conditions, notwithstanding, the yen will likely benefit from ongoing economic difficulties in the US. Moreover, analysts predict that upcoming Japanese data will show further deterioration in the country’s economic fundamentals, but few expect such developments to hinder the yen in the face of similarly poor conditions in major global economies.

GBP – The BoE cut rates further by 50-bps to 1.5% last week. This puts the total rate cut over the past three months at 350-bps. The “modest” cut by 50-bps implies that it is not quite as close to a Zero Interest Rate Policy as some analysts have been speculating. Hence, rates rose slightly and the GBP strengthened after the announcement. Current expectations are for a further 50-bps cut in February. The GBP may remain fragile in the near-term due to the outlook of low rates, weak economic prospects for the UK, and the bleak outlook for London’s all-important financial sector. However, in the medium term the GBP is expected to improve from current levels.

CAD – Last week, the loonie gained 3.25% vs. the USD on negative jobs data out of the US.
Canada’s currency managed to reach a low of 1.1762 vs. USD in mid-week trading despite lagging crude oil prices, which reached a weekly low of $40.83/bbl. The BoC tripled the size of a cash injection last Tuesday to C$12B as part of a program to ease credit markets in a so called term purchase and resale agreement designed to fill the gap left by theprivate sector. The Central Bank has another program where it has injected more than C$30 billion into the financial system through loans to major bond dealers. The world’s eighth-largest economy is sputtering amid tight credit conditions for businesses, slumping shipments of cars and lumber to the US, as well as lower prices for exported commodities, all indicating that the economy will shrink in 2009.

MXN – The peso staged a very minor and short-lived rally vs. the USD last week reaching a low of 13.3802 only to retreat back to 13.6200 amid worsening US economic data. Banco de Mexico is expected to cut its benchmark rate by 0.25% to 8.00% this Friday. Inflation is projected to slow to 4.5% by the end of this year from a 7-1/2 year high of 6.5% set in December. Some analysts see the peso moving as high as 14.90 vs. USD by the end of Q2’09 as a slump in the US economy curbs investment flows and erodes export revenue.

CNY – The yuan is slightly lower at 6.8370 vs. USD amid broad dollar strength. The government is keeping the yuan steady between 6.82-6.86 as it acts to stimulate the economy.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Jan 14 2009, 07:30 GMT