Currencies Wait for ECB and Stress Tests

Posted May 05, 2009

The euro weakened against the dollar as investors wait for the ECB to lower interest rate. The Mexico peso fell as it became clear the swine flu outbreak will lead to a greater GDP contraction than originally predicted. The US dollar fell as the results of the bank stress tests are anticipated.


There was a lot of currency activity today as investors moved their money around seeking higher yields while anticipating the coming economic news.  The euro fell while the US dollar and yen steadied as investors try to anticipate the results of the US Treasury Department stress tests on the banks.

Some news seems to be leaking out including a report that says the banking giant Bank of America will be one of the banks that needs to raise capital.  The question is how much will have to be raised to keep the balance sheet on track in the face of rising loan losses.  These are unusual times as the recession eases even as some indicators continue to worsen.  One of the problems some analysts see looming is the fact the recession easing is built on increased government debt and even nationalization of some private businesses. 

The euro weakened to $1.3287 against the US dollar as investors anticipate the European Central Bank meeting on Wednesday, 6-May-2009.  The expectation is that there will be an interest rate cut and additional policy implementation that includes increased purchase of debt.  Members of the ECB are indicating the recession can only improve if drastic monetary measures are taken.

The euro also fell against the yen (130.82 yen).

The US dollar weakened against the yen as the expected results of the stress tests raise investor concerns.  The dollar fell to 98.46 yen.  The Dollar Index rose a bit to 84.138.

Mexico’s peso weakened against the US dollar to 13.2841 pesos.  Mexico is faced with an economic contraction now made worse by the swine flu outbreak.  Though businesses are resuming normal operations this week, the GDP is now expected to contract by 6% in 2009 instead of the 3.5 percent predicted earlier. 

Mexico will most likely reduce its benchmark interest rate next week to 5.25 percent form its current 6 percent.  The government is also introducing another stimulus plan for 27.4 billion pesos to offset some of the losses due to the swine flu.

The Canadian dollar weakened against the US dollar due to the decline in the crude oil prices for June delivery to $53.84 a barrel.   The loonie weakened to 85.13 US cents.  This represents the first decline in the currency in six days.

The UK pound strengthened to $1.5119 when paired with the US dollar.  The pound also strengthened against the euro to 88.49 pence.  The UK economy is showing signs of recession easing in the construction and commercial property markets.  The numbers are still not showing an expansion, but they are indicating the decline is slowing.

The Brazil real has been strengthening this year by 8.2 percent year to date when paired with the US dollar.  The government decided to weaken the currency by entering the foreign exchange market with reverse currency swap contracts.  This entrance into the market is a signal that Brazil believes the currency has strengthened enough at this point in light of improved trade balance numbers.  China has become a major importer of commodities from Brazil. 

The Brazil real weakened to 2.1392 real per US dollar.

The US dollar weakening led to Chile’s peso strengthening to 571.30 pesos per US dollar.  The increase in the peso took the currency to a seven month high.  Chile’s currency has been falling over the past months as the economy struggles with lowered mining and manufacturing output.

Investors are at the point now where they are ready for the US to reveal the stress test results.  The uncertainty is putting pressure on several major currencies including the US dollar and the euro.  The expectation is that 10 out of 19 banks will need additional capital.