A Brick Recession Wall

Posted January 11, 2009

The euro is falling against the dollar in response to expectations of a significant European Common Bank benchmark interest rate cut this week. The yen is the strongest currency right now as investors continue to sell higher yielding assets.


Analysts are beginning to describe the situation in the financial markets as similar to running into a brick wall.  Everyone really believed there would be more early 2009 indicators of when the global recession will begin to turn around, but things just keeping worse.   Every global event right now is only perpetuating the problem too.  The Russia/Ukraine oil crisis and the Israel/Hamas war are perfect examples of events that only exacerbate the financial problems in the global economies.

The brick wall currency traders are ramming is made up of bricks that are molded by current events.  One brick is the jobless rates reported by the USA and the United Kingdom.  Another brick is the decrease in crude oil prices from a July 2008 high of $147.27 a barrel to a current $39.50 per barrel rate.  Still another brick is composed of investors demanding foreign currencies to pay off loans.

The currency brick wall is complex.  One day analysts are predicting euro and UK pound parity is in sight, and the next day the euro has fallen to new lows.  That is because one of the bricks in the currency wall is made up of benchmark interest rates.  The European Central Bank (ECB) is expected to reduce its benchmark interest rates this week by at least .5%.  This would place the interest rate at a level it has not seen since 2005.

As a result, the euro is reflecting this expectation and it fell against the US dollar more than it has since October 2008 in addition to falling against the UK pound. The euro fell to $1.3476 versus the US dollar on 11/January/2009.  It also fell against one of the strongest currencies in the market right now – the yen.  The yen rose to JPY121.81 per euro. 

As far as the yen goes, it is one of the most active currencies in terms of price right now.  It is a strong currency that is advancing against most of the major global currencies.  In fact, as of 9/January/2008, it had gained against 13 out of 16 major global currencies for the week.  Equity markets are dropping again and investors are seeking to pay back loans with yen.  The yen rose against the US dollar to JPY90.39 per dollar.

The equity markets are taking a hit again which drives investors to currency trading when seeking profits.  The Dow Jones Industrial Average dropped 143.28 points on Friday, 9/January/2009 and closed at 8,599.18.  (So much for staying over 9,000 points.)  The NEKKEI dropped also, but nearly as much.  It stands at 8,836.80 or a 39.62 point decrease.  The FTSE also dropped to 4,448.54 which is a 56.83 point decline.

The oil prices and global events mentioned earlier are impacting Canada and Russian currency prices.  The recession in the US is lowering demand for Canadian oil which has led to a decline in Canadian currency prices against the US dollar.  The loonie fell from C$1.1797 to C$1.1867 per US dollar.

The oil prices and the Russian/Ukraine oil pipeline problems are also continuing to impact the Russian ruble.  The ruble fell to 30.5312 rubles per US dollar to 41.1317 rubles per euro.  There has been a virtual run on the Russian currency reserves account as companies use foreign currencies to pay off debt.  Since last August 2008, over $200 billion has been withdrawn from the account.  The Bank of Rossii is devaluing the ruble against the US/euro basket and it is forcing currency market trading as investors seek to get the most trading profit before the ruble is devalued anymore.

There is just so much uncertainty remaining in the financial markets because of the deepening global recessions.  It seems like everyday there is a new brick added to the wall.  Investors and analysts had really hoped 2009 would have restored some investor confidence in the markets.  But what is now happening is investors are once again retreating to the wait-and-see stance as it becomes clear government stimulus packages are still not working as intended and further intervention is necessary.

The good news is that eventually the recession will end and analysts are still predicting it will be by the end of 2009.