NEWS / Foreign Exchange

The euro begins the week near all time highs at 1.4528 achieved last week

USD ??“ Sanguine US economic data releases, notwithstanding, America??™s currency continued to lose favor amongst currency traders last week, as it plummeted to a new all-time record low against the EUR, and multi-month lows against many of its other major world counterparts. An encouraging Q3 ??™07 GDP reading of 3.9% (3.1% exp.) and a robust NFP showing (166K in Oct. vs 85K exp.), did little to negate the undercurrent of dollar bearishness ushered-in by the headline event for last week??”the US FOMC rate decision. Though markets had largely anticipated the 25-bps rate reduction delivered by the Fed, the accompanying policy bias statement could hardly be interpreted as having been hawkish, relative to future monetary policy adjustments. Nevertheless, the recent string of positive data demonstrates the remarkable resilience of US economic growth??”despite the troubles in the housing and finance sectors??”suggesting that the Fed??™s cycle of easing may have already come to an end. This morning??™s ISM Non-Manufacturing (55.8 in Oct. vs. 54.0 exp.) is helping to buoy the dollar above its recent lows. Markets will now tune in to Bernanke??™s testimony before the Joint Economic Committee on Thursday, and the additional trickling of data throughout this week for additional insight into the health of the world??™s largest economy and the direction of its currency.

EUR ??“ The euro begins the week near all time highs at 1.4528 achieved last week. The single currency will draw support from the ECB meeting on Thursday, where the Central Bank is expected to keep Eurozone interest rates unchanged at 4.00%. Despite lingering fears of further European bank write-downs stemming from subprime losses, the Eurozone economies continue to enjoy strong growth. A German export association last week predicted that Eurozone exports would expand 10% this year despite the effects of a strong euro. With the ECB likely to hold interest rates unchanged in contrast to last week??™s Fed rate cut, interest rate differentials combined with positive domestic economic conditions should continue to drive further gains for the single currency. The same German export association report also noted that $1.50 could be a significant pain point for European exporters, which gives the euro plenty of room to run before reaching this threshold.

JPY ??“ The BoJ held rates unchanged in an 8-1 vote last Wednesday. Once again the domestic sector of the Japanese economy is proving to be the downside risk. Unemployment climbed surprisingly in September to 4.0% from 3.8%, and growth in employment slowed significantly. Exports fared well with demand from Europe and other Asian countries offsetting the contracting demand from the US. Industrial output increased by 2.2% q/q in Q3, and the positive trend appears to be continuing into Q4. Contributing factors to the domestic slowdown are the tax hikes in June and tighter building restrictions. With wage growth still weak and employment growth slowing significantly it is hard to see a major increase in private consumption in Q4. This, of course, brings a rate hike for the remainder of 07??™ into serious question. Yen remains strong on diversification out of riskier higher yield carry-trades.

GBP ??“ The BoE rate meeting this Thursday is of particular interest to the markets this week. At the previous gathering in October a rate cut was discussed as early as Q4 07??™. However, a series of solid economic data figures has brought that hypothesis into question. As with the US, the UK housing market has been of key focus. Despite this summer??™s meltdown in the financial markets, housing prices for October showed a 1.1% increase (9.7% y/y). Northern Rock Bank recently had to ask the BoE for assistance and the UK experienced its first bank run in 140 years and inflation fell this autumn to 1.8%. This queued up markets for an inevitable rate cut, but with higher energy costs and inflationary growth the outlook for Thursday is a rate hold by the BoE.

CAD ??“ The loonie touched a fresh, modern day high against the greenback earlier today as concerns about the US economy encouraged investors to keep buying the commodity-driven currency. CAD hit a peak of 0.9306??”its highest level since the late 1800s. Robust commodity prices have added to the loonie's strength, and while the prices of oil and gold have come-off recent peaks, they continue to be supportive. Expect CAD to continue its rise, which has surged nearly 25% since the beginning of the year.

MXN ??“ Mexico's local-currency bonds and the MXN fell as concern about growing debt-market losses at US banks prompted investors to shun higher-yielding assets in developing nations. The MXN fell 0.50 percent to 10.7409 per dollar.

CNY ??“ The Chinese yuan continues to gain vs. the USD on the back of overall dollar weakness. The yuan gained 0.56% last week, the largest weekly rise since 2005, after the Fed Reserve cut interest rates by 0.25%. China is also expected to raise rates in the near future prompting some to call for the yuan to rise to 7.35 by year end.

Last Week??™s Currency Highs and Lows and Forecast