Oh So Ugly

Posted April 03, 2009

The US jobless rate increased to 8.5% in March causing an immediate ripple throughout the financial markets. The US dollar strengthened against most major global currencies.


The condition of the US economy has an impact on global financial markets of course.  In anticipation of the March jobless rate report, confirmed today by the US Department of Labor, the US dollar strengthened when paired with most of the 16 major global currencies.  The US unemployment rate now stands at 8.5%.

As Mark Zandi, chief economist at Moody’s, so aptly stated, “It’s an ugly report and April is going to be equally as bad.” But as the US deals with a recession that just won’t stop, there are actually some glimmers of hope in the UK which has experienced the deepest recession among Economic Union countries.  One of the most recent is an indication that stimulus programs intended to promote a credit thaw by lending banks is starting to take effect.  UK banks have indicated there are plans to increase lending again.

Also in Europe, the European Central Bank surprised everyone by implementing a smaller than expected interest rate cut.  The bank cut the benchmark interest rate by a quarter point to 1.25%.  There had been speculation it would be cut to 1% or even below.

The US dollar strengthened against the euro to $1.3406 and against the yen to 99.84 yen per US dollar.  In fact, the yen broke over the critical 100 yen value briefly which is the first time that has happened since November 2008.

But with signs the UK recession may be finding bottom finally, the pound has begun strengthening once again. It rose to a level where a weekly gain is likely.  When paired with the greenback, sterling strengthened to 90.64 pence per euro.  It also advanced against the pound to $1.779.

Is the worst of the recession behind us?  Maybe it is.  It is a difficult situation to assess with certainty due to the with mixed economic news issued every day.  For example, the US jobless rate is expected to continue to rise and yet consumer spending is increasing.  Equity and currency markets will remain volatile as long as these mixed signals continue.

The G-20 issued a global response to the recession which made stock markets soar yesterday.  But some gains are being lost as the jobless data proves it is going to take well into 2010 to see real recovery from this economic crisis.  The G-20 did agree to boost International Monetary Fund lending capacity by another $1 trillion which was good news for emerging markets.  But as expected, there was no agreement on a global fiscal stimulus program.

The Canadian dollar weakened against the US dollar primarily due to the report showing US unemployment is rising.  The loonie weakened to C$1.2421 against the US dollar or 80.51 US cents.

The Mexican peso also fell against the US dollar upon the news US joblessness is rising.  The peso weakened to 13.7663 pesos per US dollar.  Mexico announced on Wednesday of this week the country is seeking $47 billion in an IMF credit line.

Analysts are expressing the opinion that emerging market currencies and commodities will be the investment choices soon as risk appetite increases.  With the IMF gaining financial power and influence which it will use to prop up weak financial structures in emerging markets, there is an expectation investors will turn to these markets for loss recovery.

The news coming from China is that March manufacturing figures are on the increase.  The yuan strengthened to 6.7410 yuan per US dollar.  China’s economy has remained one of the strongest in the world throughout the recession.  The GDP continued to grow by 6.8% for the last quarter of 2008.

The global economies are still ugly, but not quite as ugly as they were even two weeks ago.