Posted May 04, 2009
The yen and dollar fell as investors continue to move into higher yielding assets. The release of the US Treasury Department stress tests on banks are to be released this week and their impact on global markets expected to be negative.
The world markets are naturally looking to the US for signs of a recovery, but they probably won’t be found this week. The US Treasury Department has spent the last month doing bank stress tests to determine who is undercapitalized and by how much. There are already early estimates there are some banks that will still need a significant capital injection to survive the recession which could dilute existing shareholder values.
Other reports that will impact the market this week are the release of US non-farm unemployment numbers and a variety of large firm earnings reports.
An interesting development to note in another part of the world is the first annual meeting of the Asian Development Bank. The Bank was created with a $120 billion fund to provide support to select Asian countries needing financial help to deal with the ongoing recession. There are 67 member countries and this is seen as a show of developing financial clout.
Participating countries include financial giants like Japan and China and a host of smaller countries such as South Korea. This regional fund is called the Chiang Mai Initiative and it provides proof the Asian region is ready to depend on itself for financial and economic success.
Through the weekend, the yen and US dollar continued to weaken against most currencies as investors prove they are still looking for higher yielding assets. The US dollar weakened against the Australian dollar (73.32 US cents); against the New Zealand dollar (57.30 US cents); and the euro ($1.3290 US dollars).
The euro is not likely to hold onto gains as the European Central Bank meets on Thursday and is expected to institute additional bailout measures. The Bank will probably cut interest rates to 1 percent also and that would represent a 25 basis point reduction.
The US dollar strengthened against the yen though to 99.42 yen. The yen has weakened for 5 straight days now against the euro to 132.43. The yen also fell against the South Korean won to 12.8101 won per yen which is the lowest it has seen since November of last year. The yen weakening was primarily in response to signs the European recession is easing and the creation of the Asian Development Bank foreign currency reserve pool.
The markets will be coming to life this week as economic news is released. The UK pound rose last week against the euro, dollar and yen as the global recession begins to ease. The UK has had a particularly rough economic time, but the country’s manufacturing activity index appears to be on the rise. The UK pound rallied against other major global currencies. It rose to $1.4891 against the US dollar; rose to 89.09 pence when paired with the euro; and rose to 147.71 yen against the pound.
The expectation among investors is there could be a backing off from the current stock market rally, but nothing like what was seen over the last 6 months. With the signs of economic recovery will still be reports of rising unemployment and business closures. In addition, as seen over the last week, the fragile economies of some countries like Mexico will have difficulty overcoming unexpected additional stresses like the swine flu.
Finally though, it appears the downward economic spiral is slowing and by 2010 there could well be a recovery in the making. The markets are not talking right now about the staggering debt most governments have incurred during the recession, but inflation talk is now entering the picture.