Economic Indicators

The Yen has received a nice boost from Japanese exporters, which moved en masse to exchange Dollars for Yen to meet certain year-end financial obligations.  The logic is that exporters had owed money in arrears to domestic Japanese producers of the goods and services being exported and needed to be paid in Yen. Such logic could theoretically be applied to exporters in ever country, which would provide the same boost to their respective currencies.   However, in addition to being the world’s fourth-largest exporter, Japan’s economy is unusually dependent on exports.  Thus, it is understandable that Japanese exporters could exert such influence on forex markets when entering the market at the same time.

Read More: Yen Rises on Speculation Japanese Exporters Buying the Currency

Original post by Jimmy Atkinson and software by Elliott Back

Most of the world’s emerging economies link their currencies to either the Dollar, the Euro or a basket of currencies, through an outright peg or a so-called "dirty float."  These countries have attracted waves of foreign money, with the intent of buying cheap exports, foreign direct investment, and capital/forex market speculation.  As a result, while the upside of these pegs has been seemingly boundless economic growth, the downside has been inflation, since many of these countries have been forced to print money in exchange for foreign currency.  Countries in the Middle East, Asia, and Eastern Europe, especially, have effected tremendous increases in their respective money supplies with double-digit inflation rates to match.  Many savvy investors, namely hedge funds, have begun to target countries with fixed exchange rates that are suffering high rates of inflation, with the reasoning that it is inevitable such currencies will soon be forced into appreciation. The Telegraph reports:

Further east, Vietnam is throwing in the towel as inflation hits 9pc. It said it will no longer hold down the dong by massive purchases of US bonds. Singapore, Taiwan, and Korea have begun to change tack, slowing dollar accumulation before inflation gets out of control.

Read More: Hedge funds target currency pegs

Original post by Jimmy Atkinson and software by Elliott Back

The UK Pound has been on a tear recently, both against the
USD and more surprisingly, against the Euro.  The currency has been given a boost by the
Bank of England’s reluctance to cut its benchmark interest rate, which at
5.75%, remains the highest among the world’s major currencies.  However, many economists feel the case for a
rate cut is growing stronger every month, whether or not the Bank of England is
willing to acknowledge it.  Inflation is
only moderately high, while the fall in housing prices-exacerbated by a prolonged
period of tight money-threatens to drag down the entire economy.  The markets are still pricing in a rate cut by
year-end, which would surely drag down the Pound should it obtain.  Dow Jones Newswires reports:

“We strongly suspect that market pessimism in this respect
will continue to grow, in reverse proportions to its expectations of a further
hike in U.K. interest rates,” said…a senior currency strategist.

Read More: Sterling’s Strength Can’t Last Much Longer

Original post by Jimmy Atkinson and software by Elliott Back

Over the last five years, the Canadian Dollar has slowly
climbed to parity against the USD, finally reaching the mythical 1:1 exchange
rate last week. Canadian shoppers and
American tourists have taken notice, gradually adjusting their behavior in
accordance wit their changing purchasing power. For many Canadians, this has translated into more frequent shopping
trips across the border, whether for gasoline or for clothing. For Americans, this has resulted in a decline
in the number of tourists visiting Canada. It is also slowly redefining the US-Canada
trade dynamic. However, as Canada has become the United
States’ largest supplier of oil, it is likely Canada that will
benefit most in this relationship. The
New York Times reports:

The weakness of the American dollar worries some Canadian
investors as well as businesses that rely on American customers.

Read More: Currency
Parity Brings Canadian Shoppers South

Original post by Jimmy Atkinson and software by Elliott Back

That the balance of trade between the US and China is becoming more and more lopsided in favor of China should come as no surprise to
anyone.  In fact, economists yawned when
the August trade data revealed a 33% jump in the Chinese trade surplus.  As a result, many are beginning to argue that China can allow the Yuan to appreciate at a faster
pace against the Dollar, since it is obvious that China’s export sector will not be materially
affected by a stronger Yuan.  In
addition, China now exports more goods and services to the EU than to America,
yet another statistic which supports the notion that China can allow its
currency to appreciate against the Dollar (the implication here being that the
Euro-Yuan exchange rate should be more important to China at this point).  Finally, China’s inflation rate is now
hovering around 6.5%, its highest level in over a decade.  A more valuable Yuan would presumably make
imports less expensive, thus lowering prices across the board for Chinese
consumers. Bloomberg News reports:

The Chinese currency is selling for about 7.51 to the
dollar. It has risen almost 6 percent against the U.S. currency in the past year while falling more than 3 percent against the euro,
leaving the overall competitiveness of China’s exports little changed.

Read More: Rising Euro Is What China Needs to Dump Dollar

Original post by Jimmy Atkinson and software by Elliott Back

August reports show that the US lost 4000 jobs in one month. The biggest employment slump in several years, it appears that problems with the subprime market are affecting more people than ever. The dollar fell to a 30-day low after these reports went public. According to Reuters:

The euro vaulted to a one-month high of $1.3768 <EUR=>
after the report before easing to $1.3751, up 0.5 percent. The
dollar was down 0.8 percent at 114.42 yen <JPY=>, near a
session low of 114.31 yen.

Read more: Dollar tumbles as August U.S. payrolls contract

Original post by Amy Cottrell and software by Elliott Back

Officials from the State Bank of Vietnam have confirmed that the country’s forex reserves have doubled, thanks to a solid investment in US dollars. What was once enough money to pay for 10 weeks of imports now buys 20. This windfall comes with a price, however, as inflation will now increase. Deputy Governor of the State Bank, Nguyen Dong Tien, hopes to keep the adverse effects to a minimum. Reports Daily Times:

Economists say double-digit inflation is a possibility, but Tien told
the news conference that the central bank had stepped up its draining
of inflation-fuelling funds from the economy through open market
transactions.

Read more: Vietnam doubles forex reserves

Original post by Amy Cottrell and software by Elliott Back

The Euro’s rise against the USD over the last year has been
swift and unimpeded.  Many commentators
have theorized that it is intense pessimism surrounding the US economy and
economic conditions-namely the burgeoning twin deficits-that is responsible for
the Dollar’s demise.  Now, a new theory
is being batted around, one that is quickly gaining traction with analysts:
perhaps it is optimism directed towards the EU economy rather than pessimism
towards the US that is causing the Euro to spike.  After
all, the European economy has rebounded nicely and boasts stable monetary and
trade statistics.  However, this notion
of European optimism, if it in fact exists, has some analysts worried that the
markets are becoming too optimistic, and that if they are not careful,
they will end up wrecking the European economy by driving up the Euro too high.
The Times Online reports:

If the euro keeps rising without limit, Europe’s export
industries will be decimated, as they were not only in Britain, but also in America in the mid-1980s and also in Japan after 1995.

 
Read More: The euro’s rise and rise is unsustainable

Original post by Jimmy Atkinson and software by Elliott Back

The story behind the Dollar’s decline contains two threads:
narrowing interest rate differentials and growing concerns surrounding the US
economy. With most of the
industrialized world’s Central banks not scheduled to meet again for a few
weeks, the interest rate story can temporarily be placed on hold in favor of
the economic story, which is becoming uglier every day. The centerpiece remains the US housing
market, which many analysts believe will soon slide into a major rut.  There is a great deal of uncertainty over
whether homes can retain their value and if borrowers will be able to pay off
their mortgages. Rising rates have
squeezed many low-income, high-risk borrowers, causing a crisis of growing
proportions in the market for mortgage-backed securities, which is at risk for
spreading to other areas of securities markets. Forbes reports:

“Credit concerns, rating reviews, yields tumbling; it has
been one-way traffic against the dollar in recent minutes and euro/dollar has
rallied up a fresh all-time high.”

Read More: Dollar slump sends euro
to record high

Original post by Jimmy Atkinson and software by Elliott Back

The Economist just released its an updated iteration
of its famous Big Mac Index, underscoring growing disparities in currency
valuations. For those of you that
aren’t familiar, the Big Mac Index uses the price of a McDonald’s Big Mac
sandwich in different countries as a proxy for measuring purchasing power
parity (ppp), that perennial staple of economics that theorizes a country’s
currency and its inflation rate should move in opposite directions. Thus, where a Big Mac is observed to be more
expensive than in the US, it would suggest that country’s currency is
overvalued relative to the USD. Of course there are numerous other factors in
the local price of a Big Mac, including raw materials and taxes, but the index still
packs a pretty profound punch. Unsurprisingly, the most undervalued currencies can be found in Asia-
notably the currencies of Japan, China, Thailand, Indonesia, etc. The most comparatively expensive Big Macs
(and hence most overvalued currencies) can be found in Europe, especially in
Scandinavia and Northern Europe.

Read More: The Big Mac Index

Original post by Jimmy Atkinson and software by Elliott Back

These days, the US economy seems to rise and fall on the wings of the housing sector.  Unfortunately, this sector is in a tailspin as higher interest rates have left many homeowners unable to pay their mortgages, causing a crisis in the oft-cited subprime market.  Already, several hedge funds have nearly collapsed due to subprime mortgage uncertainty, and nearly 600 portfolios of subprime mortgages (representing $12 Billion) have been downgraded as a result of declining creditworthiness.  Investors fear that instability in the subprime market could spread to the rest of the US economy and/or drive the Federal Reserve Bank to lower interest rates, which would narrow the interest rate differential between the US and most of the west.  Reuters reports:

Lower U.S. bond yields arising from problems in the subprime sector have diminished the allure of U.S. Treasury debt. The yield on the benchmark 10-year U.S. Treasury note…is at 5.08 percent, down from about 5.29 about a month ago.

Read More: Dollar hits record low vs euro on subprime woes

Original post by Jimmy Atkinson and software by Elliott Back

On January 24 last year, the Forex Blog reported with great fanfare that China’s forex reserves had breached the epic milestone of $1 Trillion. [In hindsight, it turns out that the psychologically important barrier was broken several months earlier, but that is beside the point].  Less than one year later, China’s forex reserves reached another important threshold, soaring past $1.5 Trillion. It appears that new reserves are being accumulated at  an exponential rate, having increased $460 Billion last year and over $30 Billion in the month  of December alone. By no coincidence, China’s 2007 trade surplus of $262 Billion shattered the previous record and is expanding at a comparably supersonic pace.

Most analysts reckon that the country is locked in a vicious cycle: when its trade surplus grows, its forex reserves grow proportionately. Moreover, the lopsided trade imbalance th\at China maintains with most of the world ensures that the demand for Chinese Yuan exceeds the supply. In the short run, a more expensive currency equates to higher prices paid for its exports which only increases the trade surplus and forex reserves further, and exerts still more pressure on the currency to appreciate.  Meanwhile, as the Yuan rises, the value of China’s forex reserves, which are denominated predominantly in USD, falls.  What a conundrum indeed! Xinhua News reports:

The value of Chinese RMB against the US dollars has appreciated by over six
percent in 2007. The central parity rate of the RMB was 7.2672 to the
US dollar on Friday.

Read More: Forex reserve tops $1.53 trillion

Original post by Jimmy Atkinson and software by Elliott Back

So-called ‘Sovereign Wealth Funds’ are the talk of the town, stealing headlines as part of a multi-billion dollar buying spree.  Anecdotally, stories of these funds and other institutional foreign investors have made a big splash, epitomized by a few high-profile investments in struggling American investment banks.  It no longer appears these stories were isolated, as suggested by some pretty compelling economic data.  In 2007, total foreign direct investment into the United States totaled $400 Billion, which represents a 90% increase over 2006.  In addition, the first few weeks of 2008 saw a frenzy of activity, which suggest this trend will continue.  Investment in the US is being driven primarily by a weak Dollar and attractive stock market valuations.  If the bad news on the US economy continues to pour in, analysts warn that foreigners could play an even larger role in mitigating against recession. The New York Times reports:

The weak dollar has made American companies and properties cheaper in
global terms. Even as
Americans confront the prospect of a recession, economic growth remains
strong worldwide, endowing oil producers like Saudi Arabia and Russia
and export powers like China and Germany with abundant cash.

Read More: Overseas Investors Buy Aggressively in U.S.

Original post by Jimmy Atkinson and software by Elliott Back

As far as Dollar bulls are concerned, all news is bad news. An economic recession seems inevitable.
Interest rates are already negative in real terms, and are now the
lowest in the industrialized world, save Japan.  It’s still unclear
how much subprime debt will be written down by financial companies
before all is said and done.  But analysts from Brown Brothers
Harriman, an investment bank, think the Dollar’s multi-year decline
is coming to an end.  There are two main reasons underlying their
rationale.  The first point is purely technical- that the all of the bad news and in fact, the worst
possible scenario, has already been priced into the Dollar.  The
second point is fundamental- that the speculative hot money that has
poured into the US as foreign investors take advantage of a weak
Dollar and that is sustaining the US current account deficit is now
transitioning into long-term foreign direct investment.  The
Financial Post reports:

In addition, BBH believes that in a
weak dollar environment, foreign companies will now start looking to
move production and sourcing to the United States, following the
successful example of Japanese auto makers.

Read More: Greenback is nearing bottom,
currency experts say

Original post by Jimmy Atkinson and software by Elliott Back

As talk and evidence of a US economic recession builds, the Dollar has witnessed a slight upswing.  How to explain these seemingly contradictory trends? The rationale is surprisingly simple.  While a US recession would predictably hit the US harder than other countries, it would still hamper growth abroad, especially in emerging markets that have come to depend on exports to the US to drive growth.  Accordingly, investing in such emerging markets becomes relatively more risky than investing in the US, which is still considered to have the world’s most stable investing climate from a long-term perspective.  Thus, as risk aversion rises, so does the Dollar. Thomson Financial reports:

The combination of poor data weighed on stock markets in the US and Asia, while major bourses in Europe have all opened lower today. This meant the dollar gained support as investors shy away from riskier emerging market assets.

Read More: Dollar gains on the back of rising risk aversion

Original post by Jimmy Atkinson and software by Elliott Back

China’s trade surplus grew 22.6% year-over-year for the month of January, on top of export growth of 26.7%.  If there is any silver lining to what many policymakers would consider bad news, it is that growth in imports is slightly outpacing growth in exports.  Unfortunately, that is unlikely to allay the critics, and there are still many of them. The argument remains unchanged- that China is not allowing its currency to rise fast enough.  On paper, however, the Yuan has appreciated by 15% since China officially de-pegged it from the Dollar in July 2005.  In addition, the G7 failed to scold China in its annual meeting, which suggests that economic policymakers are becoming less concerned with China’s forex policy.  Ironically, the revaluation of the Yuan is probably boosting the value of of China’s exports in the short-term, because other countries are now paying more for the same quantity of imports.  AFP reports:

The International Monetary Fund…urged the Chinese
government to loosen the reins on the yuan. "We encourage a
faster pace of appreciation that would be helpful for addressing
China’s key economic challenges and would also contribute to preserving
global economic stability."

Read More: China’s trade surplus rises 22.6 percent in January

Original post by Jimmy Atkinson and software by Elliott Back

Remember the expression "Goldilocks economy," used to to characterize the Fed’s perennial aim of simultaneously pursuing economic growth and price stability?  How about "stagflation," a term coined in the 1970s to describe a unique period in US economic history where low growth coincided with inflation.  Now, these two scenarios are being juxtaposed as the Goldilocks economy gives way to stagflation. The Fed is trying to delicately toe the line, as equity and home prices sink while prices rise; one index suggests prices have risen over 7% year-over-year.  The index more often cited, the CPI, reads 4.3%.  Both of these figures exceed current interest rate levels. 

What, then, is the Fed’s proper course of action, especially as far as Dollar bulls are concerned?  If it holds rates or contindfues to lower them, the economy could avert recession but prices would likely continue to climb, eroding the value of the Dollar.  On the other hand, if rates are hiked to mitigate against inflation, a recession would almost become inevitable, and the Dollar would feel the drag of capital being pulled overseas. The New York Times reports:

“February may go down in history as the month that the previously
indefatigable U.S. consumer finally threw in the towel, beaten by a
combination of deteriorating labor market conditions, surging prices
for food and energy and collapsing house prices,”

Read More: As Inflation Rises, Home Values Slump, Data Show

Original post by Jimmy Atkinson and software by Elliott Back

Recent news reports have painted a downright bleak picture of the US economy. Home prices are now falling. Equity prices are also falling, at an annualized rate of 20%.  Meanwhile, energy and food prices are rising, dipping into what little purchasing power consumers can still claim.  Somehow, as DailyFX, recently reported, the Dollar has held its own. Their reasoning is that there is a struggle being waged in forex markets between yield and growth. On the one hand are investors who are bearish on the Dollar because of interest rates that are headed downwards, despite already being low.  On the other hand are investors who think that yield is comparatively unimportant, since the rate cuts are needed to shore up the economy. While interest rate differentials do not favor the US, the economic growth that they are intended to bring about tell a different story. DailyFX reports:

The only problem with this thesis is that 2 percent interest rates or 100bp is about as low as the market expects the Fed will go. If banks are forced to take more write-offs and the US economy deteriorates further, the Federal Reserve may be forced to go below 1.00 percent.

Read More: What Matters More For the US Dollar:  Yield or Growth?

Original post by Jimmy Atkinson and software by Elliott Back

In a recent article published in the Toronto Star, a Canadian columnist outlined five reasons why the Canadian economy is in trouble.  Only a couple factors are unique to Canada, and several can be subsumed under the credit crunch, but the pessimists are sounding broad alarm bells. First on the list is the looming drop in prices for commodities, the cornerstone of Canada’s economy. Oil recently sank below $100/barrel, and gold dropped 5% in one day! In addition, China is threatening to curb demand in order to rein in inflation. 

The second and third causes for concern are a decline in bank credit and loss of confidence, respectively. Neither of these factors are endemic to Canada, as banks around the world have suddenly developed an aversion to risk and have tightened lending accordingly. Next, corporate expansion (namely of American companies) is stalling; Home Depot and Proctor & Gamble have already announced a temporary hold on opening new stores in Canada.  The final factor(s) are American consumers, which collectively spend $9 Trillion per year.  The recent tightening of wallets could spell massive trouble for Canada, since some of its provincial economies are primarily driven by cross-border sales to Americans.

In short, the Canadian economy could actually contract in 2008.  But perhaps the resulting decline in Canada’s currency, the loonie, would make Canadian exports comparatively more attractive and return the economy to firm footing in 2009.

Read More: 5 reasons to start worrying

Original post by Jimmy Atkinson and software by Elliott Back

Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest. On the other hand, emerging markets, especially those with current account deficits, have witnessed capital flight and subsequent currency depreciation.  The currencies of South Africa and Iceland, for example, have both experienced declines 20% since the start of this year.  Risk premiums had fallen to historic lows prior to the credit crunch, and neither country experienced great difficulty financing its respecive deficits.  However, investors are growing increasingly nervous and are shifting capital to countries with stable current account balances. The Financial Times reports:

Goldman Sachs says: "We have long argued that in times of global turmoil suppliers of capital are poised to outperform countries in need of capital.  However, it is only since January 2008 that we have seen the current account theme really gain momentum in the FX market."

Read More: Currencies at mercy of deficits

Original post by Jimmy Atkinson and software by Elliott Back

In a research note, two economists from Morgan Stanley predicted that the Euro will soon come crashing down, failing in its bid to rival the Dollar as a viable reserve currency. They observed that in the beginning of the decade, the Euro was viewed as joke from an economic standpoint. Since long-term economic fundamentals can’t reverse themselves in only a few years, they reasoned that the Euro’s rise must instead be a product of financial (capital flows) trends. Furthermore, as the EU becomes further integrated, a need will develop to diversify capital outside of the EU, thus reversing the trend of the last few years of diversification within the EU. The Globe and Mail reports:

The euro is overvalued because institutional investors…world
have been diversifying out of their home markets at the same time as
European investors have largely been diversifying within their home
market.

Read More: The euro as reserve currency? Hah!

Original post by Jimmy Atkinson and software by Elliott Back

2008 has witnessed a rapid appreciation in the Euro, which recently breached the psychologically important $1.60 barrier. Last week, however, the Dollar dramatically reversed course, leading many traders to speculate that the Euro’s best days may be temporarily behind it. There are two ideas underlying this theory. First, the Federal Reserve Bank is probably near the end of its tightening cycle, while the ECB has yet to begin. In addition, recent economic data suggests that the Euro-zone economy, which has appeared recession-proof in spite of the credit crisis, may soon falter. The best-case scenario, according to Dollar bulls, would be a loosening of monetary policy in the EU simultaneous with tightening in the US. If such a scenario were to obtain, it would bridge the interest rate differential between the two economies, which many believe is behind the weakness in the Dollar. The Wall Street Journal reports:

If bad news out of Europe starts to accumulate and the Fed stands pat, the dollar’s slide could taper off.

Read More: An Endgame for the Euro?

Original post by Jimmy Atkinson and software by Elliott Back

Earlier this week, the Forex Blog speculated that the tide was turning on the Euro, which  had retreated from the $1.60 threshold. Sure enough, the month of April saw the best monthly performance by the Dollar in over two years. The sudden about-face by the Dollar stems from changes in interest rate expectations. Only a couple weeks ago, the consensus among investors was that the Fed would cut rates further at its next meeting; the only point of uncertainty was whether rates would be cut by 25 or 50 basis points.

As of today, however, there is only a 25% chance that the Fed will cut rates at all, if you go by futures prices. Regarding the Euro, investors are no longer so sure that the ECB will hike rates in response to surging inflation. In short, the new consensus is that the US/EU interest rate differential has stabilized. Then there is the economic picture; investors have "chosen" to be pleasantly surprised by the most recent economic data. While the economic downturn still seems inevitable, it may not be as severe as investors had previously feared. Reuters reports:

In contrast to slightly stronger U.S. data, the Ifo German
business sentiment index this week showed the biggest monthly
fall since September 2001.

Read More: Dollar heads for best month in 2-1/2 years

Original post by Jimmy Atkinson and software by Elliott Back

2007 was a banner year for the Turkish Lira, which appreciated 21% against the US Dollar. However, in the year-to-date, the currency has returned nearly 10% of this gain, making it the third worst performing currency in the world. Turkey generally, and the Lira specifically, are considered by investors as proxies for emerging markets. The global trend towards risk aversion, as well as skyrocketing inflation, are hurting many such currencies. In Turkey, inflation is so problematic (9.4% at last count) that the Central Bank has raised its benchmark interest rate to 15.25%. Ironically, the more the Lira depreciates, the harder it becomes for the Central Bank to control inflation, causing the Lira to slide further as part of a self-perpetuating free-fall. In addition, the country is beset by political uncertainty, as the courts determine whether the nation’s current government can stay in office. Bloomberg News reports:

"The recent political developments are likely to complicate
policy-making and the investment climate. The
deteriorating political backdrop will in turn undermine the
prospects for restoring fiscal discipline and reviving the reform
agenda."

Read More: Lira Goes From First to Worst as Politics Whack Bulls

Original post by Jimmy Atkinson and software by Elliott Back

The Federal Reserve Bank recently lowered interest rates for the seventh, and perhaps final, time, bringing its benchmark federal funds rate to 2.0%. Since inflation is still hovering around the 4% mark, the Fed will probably be reluctant to lower rates further. Thus, the markets have been given all of the boost that they are likely to receive, and it is "fate" that will determine whether the economy will find its footing. (GDP growth clocked in at an anemic .6% for the last two quarters). The most recent data (including the just-released jobs data) indicate that the economy may be stabilizing, although consumption and the employment situation are still deteriorating. As a result, the National Bureau of Research has yet to officially declare the current economic downturn a "recession," since the picture remains nuanced. The New York Times reports:

The recession-or-not question is now almost entirely
academic, Mr. Bernstein contended, given the steady erosion of American
spending power and soaring costs for food and gasoline.

Read More: Low Spending Is Taking Toll on Economy

Original post by Jimmy Atkinson and software by Elliott Back

Although the first quarter of 2008 ended on March 31, it wasn’t until last week that the Federal Reserve Bank finally finished tallying all of the data and released its obligatory report on the performance of the Dollar. On a trade-weighted basis, the Dollar declined 4%, a figure which accounts for a whopping 11% decline against the Japanese Yen and an 8% decline against the Euro. According to the Fed’s analysis, January was relatively kind to the Dollar, as traders remained uncertain as to how the credit crisis would affect the US economy. An outpouring of negative data in the next 4-6 weeks sent the Dollar spiraling downward, although it recovered at the end of March, as the Fed moved to build liquidity in the financial markets. The Fed also noted that it did not intervene in currency markets during the first quarter, firmly putting to rest rumors to the contrary. Forbes reports:

There had been intermittent
discussion in the markets of a coordinated foreign exchange
intervention by the G-3 central banks, but the Fed report confirmed
officially what markets already realized.

Read More: NY Fed reports trade-weighted dollar down more than 4% in first quarter 

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday’s release of the minutes from the Federal Reserve Bank’s April meeting sent shock waves through the investing community. The text revealed that the Fed Board of Governors has become significantly more bearish on the outlook of the US economy, as compared to sentiments expressed at the January meeting. The consensus forecast covering 2008-2009 worsened for all of the major economic indicators, including GDP growth, inflation, and employment. If the low end of the new GDP estimate ultimately obtains, the US economy will expand by only .3% for 2008. Fed officials went so far as to say that even by 2010, they don’t expect rates of inflation and unemployment to return to acceptable levels. To make matters worse, the minutes revealed some opposition to the 25 basis point rate cut that was implemented at the April meeting, on the basis of inflation concerns. The minutes further confirmed that the Fed does not plan to cut rates any further, for fear of stoking price inflation and fomenting another asset bubble. The Wall Street Journal reports:

In a speech Wednesday, Fed Governor Kevin Warsh said the central bank
now must look to financial
institutions to raise capital and take other actions to improve market
functioning.

Read More: Fed’s Forecast Grows Gloomier

Original post by Jimmy Atkinson and software by Elliott Back

While the credit crisis has ravaged the economies of the US and the UK, the EU has largely been spared. First quarter GDP grew at a healthy annualized rate of 2.8%, helped by a whopping 6% expansion in Germany. However, a number of economic indicators now suggest that all is not well on the European front. Business and consumer confidence indexes are trending downward. Manufacturing output is down. So are retail sales. Spain, which benefited the most during the credit boom, is now reaping the greatest losses during the crunch, and could put a drag on the entire Euro-zone. One prominent economist is predicting that the EU economy won’t expand at all in the second quarter.

Unfortunately, the only data point which is trending upwards is inflation. Even though the EU is much more efficient than the US in terms of its use of oil, record oil prices (as well as food prices) are taking their toll. As a result, the European Central Bank cannot (or will not) lower interest rates until price inflation returns to a more palatable level. Accordingly, EU member states are taking matters into their own hands by unveiling economic stimulus plans and tax cuts. As far as the Euro concerned, the ECB’s focus on price stability (at the expense of growth) is not hurting the common currency, although if the economy really tanks, the story could change depending on concurrent circumstances in the US. The Economist reports:

The ECB has a strict remit to keep inflation
in check, so rising commodity prices are likely to keep interest rates
high, lending further support to the euro.

Read More: The euro-area economy - Too good to last

Original post by Jimmy Atkinson and software by Elliott Back

According to one index, commodity prices have risen 40% over the last twelve months. One would therefore expect the Canadian economy to be commensurately strong. According to the most current economic data, however, just the opposite is true. Wholesale manufacturing sales are down for the second straight quarter. Non-commodity exports are also trending downwards due to sustained economic weakness in the US, Canada’s most important trade partner. Continued strength in the Canadian Dollar is also to blame. In addition, Canadians are traveling abroad in greater numbers, while international visitors to Canada have dwindled to record lows. As a result, Canadian GDP is expected to fall close to 0% for the second quarter, significantly below the Central Bank’s goal of 1%. The Bank will likely respond with a series of rate cuts, perhaps totaling as much as 1%, intended to reduce buying pressure on the Loonie and ignite the economy. Canada.com reports:

"The loonie is rising, boosted by last week’s energy and
resource powered rise in the trade surplus as well as a positive
interest rates spread."

Read More: Deeper rates cuts expected as Cdn. economy slumps

Original post by Jimmy Atkinson and software by Elliott Back

In the near future, this day may be looked back on as important in the battle between the Dollar and Euro that is currently being waged. The previous month had been relatively kind to the Dollar, which had gradually clawed its way back from a record low against the Euro. Then came yesterday, when Jean-Claude Trichet, leader of the European Central Bank, surprised investors when he announced that not only will the ECB not be cutting rates, but in fact, it may hike them. If enough members of the Central Bank become convinced that inflation is unlikely to abate, the rate hike could come as soon as next month. Today, the knockout punch was delivered, when the US unemployment rate came in at 5.5%. Not insignificant by itself, what was most shocking was that the crucial indicator had risen .5% from last month, its largest increase in more than a decade. Reuters reports:

That should undermine the dollar’s prospects…"The focus is on the unemployment rate, as it’s obviously
starting to catch up with the softening in the payrolls
figures…and that’s what the market is reacting
to."

Read More: Dollar falls as US jobless rate shoots up

CB,

Original post by Jimmy Atkinson and software by Elliott Back