Is There a Bottom?

Posted March 05, 2009

The UK pound held firm against the euro as the Bank of England cut interest rates. There seems to be no bottom to the recession at this point as financial markets remain extremely volatile with further declines predicted.

 

This is a currency market review, but currency markets are intricately tied to the condition of the equity markets as investors seek to protect their money from further losses.  Unfortunately there does not seem to be a bottom to this recession as equity markets continue to decline around the world leading to the US dollar being sought as the safest risk averting haven for currency traders.

The problem right now for currency traders is the fact it’s almost impossible to predict government responses at this point.  For example, Australia’s decision to not lower interest rates was unexpected.  Yesterday a rumor was started in the investment world that China would be introducing a stimulus package and stock markets rose.  Today China said: no deal.

The Bank of England did decide to reduce its interest rate to .5%.  The Eurozone also cut interest rates by a half percentage point bringing the benchmark rate down to 1.5%.  Unfortunately the banks are running out of interest rates to cut and then what?  That is exactly what currency traders are wondering as the UK pursues a quantitative easing policy and the US introduces details of government support for consumer mortgages.

Also unfortunately is the fact the markets have no confidence in the stimulus packages past or present.  The UK pound held firm against the euro as banks battle the recession with interest rate cuts.  The UK pound reported at 89.22 pence per euro while weakening against the US dollar ($1.4064) and the yen (139.34).

The euro fell against both the dollar and the yen as both remain the strongest currencies in an uncertain market.  The euro weakened to $1.2514 against the US dollar and to 123.56 against the yen.  On the other hand, the yen did strengthen against the US dollar to 98.68 yen per dollar. 

Australia has announced it will most likely officially recognize the country is in a recession.  The Australian dollar fell to 64.24 US cents and to 63.464 yen.

Current news impacting both the stock and currency markets is the likely failure of General Motors which is the largest US auto maker.  The failure of General Motors would only exacerbate the global recession because the company relies heavily on foreign auto parts.  Despite billions of government dollars already invested in the company, the massive losses continue as the company shows a 56% decline in auto sales.

China seems to be the only bright economic spot right now and says the country will reach an 8% GDP growth rate for 2009.  It’s hard to believe when exports have slumped so low.  In comparison, The Eurozone GDP contracted 1.5% the last quarter of 2008 and the US GDP for the same period declined by 1.6%.

Most projections say there will be no recovery beginning in 2009 unless some of the stimulus packages take hold.  The Dollar Index pairs the US currency against a 6-country currency mix.   The Dollar Index strengthened to 89.624 which was the highest it has seen since 2006.  The US dollar and the yen are refuge investments in a financial market that continues to foment with bad news concerning production, export and consumer spending rates.

Is there a bottom to this recession?  Well of course there will be.  But it pays to be realistic too and the reality is this recession is different from past recessions and so is not predictable.  That’s why you read analysts saying one day the recession will bottom out in the 3rd quarter of this year and the next day saying no end is in sight. 

To state it bluntly, the fact is no one really knows where the bottom will be found. 

Today’s prediction: Lower.

 

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