Is It Snowing Outside?

Posted December 02, 2008

The new month began with a flurry of economic news affecting currency rates. Many currencies fell against the US dollar as economies continued to contract.


As fast and furious as the economic and currency news was coming in yesterday, you would have thought it was snowing.  But the flurry of news was generally not good and it is becoming difficult to believe that anyone really knows how to fix the economies around the world.  But they are trying, and every time they try, things seem to get worse.  It is like when the snow plough comes through and clears the road, but manages to block all the driveways.  So you just shovel the snow back into the street and the street turns into a mess.

So here are a few of the biggest flakes which fell yesterday….

We might as well start with the very worst news.  The Dow Jones Industrial Average declined 679.95 points on 1/December/2008.  It bottomed out at 8,149.09.  This decline represents reality in that a bullish rally is apparently not going to happen yet as hoped.  The increase in the DJIA experienced the last 5 working days was halved by the decline.

The DJIA slumped as investors began to accept the fact the US is in a true recession and has been since the beginning of the year.  You knew and I knew, but the investors continued to hope it was not true.  The US is not the only country dealing with recession of course.  Brazil, the United Kingdom, Japan, Australia, New Zealand, and China to name just a few of the biggest economies are facing rapidly declining economic conditions leading to investor responses as they seek safe havens for their money.

The yen fell against the dollar which ended a 5-week increase upward.  The yen also weakened against the euro.  The primary reason for the weakening of the yen is the need of investors to find currency to complete their 2008 funding requirements.  The yen declined mostly on speculation the Japanese will have to turn to foreign currencies to accomplish their goal.  The yen fell to $.0107 in US dollars on 1/December/2008.

The British Sterling also declined against the dollar to $1.4916 as of the close of the DJIA, and is on a slide expected to continue.  The Bank of England is sending out another snow plough….interest rate cut….to try and prevent the recession from worsening.  The bank is expected to lower interest rates by 2% which will leave the rate at 1%.  One more cut and there will be a zero interest rate.

In other parts of the world, even countries known for climatic droughts are facing a cold flurry of currency changes.  The Australian dollar ($.6437) declined again against the US dollar in reaction to the DJIA drop as did the New Zealand dollar ($.5325).  The banks of both countries are set to lower interest rates which will result in foreign investors looking elsewhere for higher yields.  Both currencies are expected to experience a lot of selling pressure.

The snow in the driveways of these countries is getting piled high…

Russia, as reported, is also struggling do deal with a currency problem.  The country has been busy spending its foreign reserves to stave off further declines in the ruble.   Russia has the world’s third largest reserve account and is being used to manage the country’s currency rates within a trading band.  The reserves are composed primarily of US dollars and euros.

In other countries, the same bleak picture continues to emerge.  The snow ploughs trying to keep the currency and equity markets stable are having to work excessively hard.  Brazil’s real ($.4281) weakened against the US dollar as did the South African rand ($.0955).  The Chinese yuan ($.1452) is under selling pressure as the country faces a recession that is rapidly deepening due to lowered export orders. Treasury Secretary Paulsen is meeting with China this week under the US-China Strategic Economic Dialogue forum to discuss ways to improve the trade status of both countries which has a direct bearing on currency rates. 

One of the reasons the equity markets in every country are refusing to become bullish is the fact investors still have no confidence the governments are actually in control of the financial situation.  For a couple of weeks, the US market showed some signs it would put some trust in President-elect Barack Obama to handle the economic conditions quickly.  But even that future hope is fading and markets are taking real beatings as a result.

So the snow ploughs will be out for a long while it seems….trying to stem the flurry of bad news piling up in economic driveways.