The yuan rose slightly to 6.8284 vs. USD, amid an easing of risk aversion
USD -- An ostensible pause in the powerful recent trend of “safe haven” flows into America’s currency has caused the greenback to give up some of its gains vis-à-vis its major world counterparts, save the JPY—another beneficiary of the market’s “flight-to-quality” response.
This morning’s announcement that Citigroup received $306B in US government guarantees for its troubled assets helped to assuage market fears that the collapse of what was recently the world’s largest financial institution was no longer a likely scenario. Furthermore, the categorical rising of treasury yields following the announcement of President-elect Obama’s selection of NY Fed Governor Geithner as the next Treasury Secretary, suggests that markets are hopeful that a solution to the credit crisis is on the horizon, thereby reducing demand for the greenback as a haven. Key price data last week confirmed that inflationary pressures are on the decline: PPI (-2.8% in Oct. vs. -0.4% prior); CPI (-1.0% in Oct. vs. 0.0% prior).
Moreover, a deplorable showing in the Initial Jobless Claims Index (542K for 11/15 vs. 505K exp.), a dismal Leading Indicators Index (-0.8% in Oct. vs. +0.3% prior), and a disappointing Philly Fed Index (-39.3 in Nov. vs. -35.0 exp.) all pointed to the continuing weakening trend of the world’s largest economy. This morning’s Existing Home Sales Index, furthermore, yielded another disappointment (4.98M in Oct. vs. 5.18M prior), portending another wave of stalling home sales heading into the year-end holiday season. Consequently, the slew of less-than-encouraging economic data have increased the odds of a 50-bps rate cut on 12/16 to 92% compared with zero odds a month ago. With the Thanksgiving holiday thin trading conditions may lead to exaggerated price action.
EUR -- The euro rose following news of a $20B rescue of Citigroup eased risk aversion in financial markets. The single currency rose to the upper end of recent ranges above $1.28, rebounding from the low $1.24s last week as global equities plumbed new depths amid fears of a collapse of one of the largest US banks. Today’s euro rebound is providing a temporary reprieve for the single currency as the E-15 grapples with recession. German Ifo, an index of business sentiment, fell to near 16-year lows at 85.8 today, while Eurozone new orders fell -3.9% in September. The ECB is widely expected to cut interest rates another 0.50% in December to jump-start the economy. Given the prospects for lowered interest rates amid a faltering economy, euro weakness is likely to persist.
JPY -- The yen weakened on Monday as risk aversion eased after the Citigroup rescue plan announcement this morning. However, the low-yielding currency remains strong with investors continuing to decrease positions in higher-yielding ones in an ongoing reversal of the “carry trade”. Trading activity was thin today with Japanese financial markets closed for a national holiday. Last Friday, the BoJ kept interest rates on hold at 0.3%, as expected, as the Central Bank had little room to maneuver and may be poised to return to its Zero Interest Rate Policy that it implemented in the 1990s until July 2006. Governor Shirakawa said he is exploring new ways to infuse money into the system, while Finance Minister Nakagawa reported that Japan must be ready to deal with large market movements (read: currency intervention). Interestingly, the correlation between the JPY vs. USD movement and the Dow Jones is near the highest level in at least 20 years, and with worldwide stocks likely to fall even lower, the outlook suggests the JPY could gain much more.
GBP -- Today Chancellor of the Exchequer Darling predicted the UK economy may shrink by as much as 1.25% next year—the most since 1991. Darling said British GDP will contract in Q1 and Q2 ’09 and will begin growing again in H2’09. “I'm confident the slowdown will be shallower and shorter than would have been the case without the measures the government is announcing today,” said the Chancellor. The GBP is currently trading at 1.5140 against the USD after trading between 1.4705 and 1.5063 last Friday night. The GBP has managed to claw its way back from its record low against the euro and a six-and-a-half year low against the greenback as it was lifted by hope that the pre-budget report to be released later today will offer enough measures to stimulate the economy.
CAD -- The loonie continued its losing course last week falling 7% vs. USD as it continued to track crude oil and react to continuing recessionary erosion in its largest trading partner, the US. In a move to stimulate liquidity the BoC bought C$4B (US$3.28B) of securities last week from commercial banks and brokerages for 28 days to help credit markets loosen. Further indication of economic slowing in North America’s #2 economy came in the form of declining retail sales led by the Durable Goods Index (-9.1% m/m). At the current pace Canada is on course to post its first budget deficit in more than a decade.
MXN -- The peso gave up nearly 6.5% vs. USD on recessionary sentiment in the US and crude prices dipping below the psychologically significant level of $50/bbl. In a continued effort to stave-off peso weakness Banco de Mexico sold another $400M in USD currency reserves last week to no avail. The currency weakened further last Thursday after a report showed industrial production in Mexico fell for a fifth straight month in September as demand for the country's products waned in the US. Nevertheless, the National Statistics Agency reported that Mexico's economy expanded 1.6% in the Q3’08 from a year earlier.
CNY -- The yuan rose slightly to 6.8284 vs. USD, amid an easing of risk aversion. Markets are pricing a 2.53% decline in the yuan in 12 months as the Chinese central bank warned about deflation risks to the economy.
