A Case of Indigestion

Posted February 04, 2009

The currency markets are extremely quiet right now with investors waiting on the sidelines while digesting the global economic stimulus news. The Russian ruble is taking center stage right now as the government threatens to institute a floor. The UK pound strengthened against the euro as purchasing and supply index announcement shows surprising increase in January.


The currency markets are extremely quiet right now as investors wait on the sidelines while digesting the rash of economic news hitting the headlines.  Here’s just a sample of yesterday's news which can have an impact on currencies in the near and long-term future. 

* Ireland has announced it will be cutting public spending by $2.57 billion, during a time when increased stimulus spending is needed, in order to improve its financial status. 

* Poland has approved a plan to cut public spending by $5.65 billion or 19.7 billion zlotys. 

* Japan is spending 1 trillion yen or $11.12 billion to buy weak bank stocks trying to avoid a banking crisis. 

* The financial conditions of Chinese businesses in all sectors are deteriorating rapidly as indicated by profit projections for 2009. 

* US auto sales continue to decline as consumers rein in spending out of fear of unemployment and lack of confidence in the economy. 

All this economic news indicating a struggling global economy can give you indigestion to say the least.  There are some bits of good news such as a small increase in new US home mortgages awaiting approval has been reported.  But the bad news far outweighs the good news to the point US President Obama said publicly the US economy is in worse condition than he initially understood. 

The UK pound did strengthen against the euro (88.89 pence) and the US dollar ($1.4486).  The increase was primarily due to the news the Chartered Institute of Purchasing and Supply Index showed an increase in the UK service industry from 40.2 in December 2008 to 42.5 in January 2009.   There is general agreement the UK might have already found its price floor because the ongoing bad news has already been factored in so sterling has no where to go but up. 

The main concern in the currency market right now is the ruble.  While most global currency prices are holding relatively stable, the Russian government is struggling to offset investor efforts to let the currency devalue for purposes of profit taking.  The ruble is priced against a basket of currencies made up of US dollars and euros.  The trading band was recently widened and now the currency has devalued to the point where it is threatening to breach the new limit.  The new limit has been set at 41 rubles against the basket.   Right now the ruble has weakened as close to that level as possible without breaching it.

The ruble currency valuation is quickly turning into a battle between the government and the investors.  Russia has already spent over one-third of its currency reserves trying to prevent further ruble devaluation. 

The Ruble has seen a dramatic weakening over the past few months largely due to the decline in the prices of a barrel of crude oil.  Investors have also been selling the ruble as they seek safe haven investing avenues such as the US dollar and yen.  The ruble is at 35.958 rubles per US dollar. 

The dollar weakened yesterday as the DJIA stock market rose by 141.53 points to close at 8,078.36.  The equity market seems to be hovering around the 8,000 level right now.  The dollar weakened against the euro ($1.3040); the yen (Y89.22); and the UK pound ($1.4466).  The dollar strengthened against the Swiss franc to 1.1624 francs per US dollar.

Investors may be sitting on the sidelines right now, but it's most likely it is with severe cases of indigestion as they digest the incoming bad economic news.