Singing the Recession Blues

Posted January 08, 2009

The UK pound advanced against the euro due to a reduction in the Bank of England benchmark interest rate. The Japanese yen advanced as investors once again seek safe haven investments.


The currency news shifted yesterday to the United Kingdom and Japan.  As the first week of 2009 trading activity unfolds, it is clear that global economies are a long way off from a turnaround.  In the US, analysts are predicting a turnaround of the recession could begin in the middle of 2009, but right now there are really no indications of that except for increased investor confidence in the ability of the government to protect financial markets.

But even President-elect Barack Obama said that additional stimulus is needed in the economy in order to avoid double digit unemployment and continued business failures.  The financial gurus in the United Kingdom must agree, because the Bank of England reduced the benchmark interest rate to the lowest level it has ever been at 1.5%.

The expectation the interest rate would be reduced was not fully built into the sterling price, because it strengthened against both the US dollar and the euro upon the rate reduction announcement.  The UK pound was at 89.28 pence per euro and at $1.5181 per US dollar late yesterday, 7/January/2008, New York time.  As an historical note, it is interesting to point out the 1.5% rate is the lowest rate the Bank of England has seen since it was created in 1694.

The UK government is also planning on taking further stimulus action in an attempt to slow or reverse the recession.   What those actions will be are not determined yet.

The problem governments are facing is the fact that interest rates close to 0%, which are not stimulating the economy, are an indication markets are not going to respond to traditional monetary actions.  There are calls in the UK for the government to become much more aggressive and proactive in dealing with the recession. 

The yen has begun to strengthen against the dollar and the euro due to uncertainty about the impact of the Middle East conflict and the deepening European, Asian and USA recessions.  The yen advanced against the US dollar to JPY91.74 per dollar.  The yen strengthened against the euro to JPY124.34 per euro.  The yen is strengthening due to an increased mood of risk aversion gripping the financial markets once again.

The Australian dollar fell against the US dollar to $.7050.  The New Zealand dollar also fell to $.5863 when paired with the US dollar.  Both currencies also weakened against the yen.  The weakening of the currencies is primarily due to the declining commodity prices.  Commodity prices impact the amount of export revenue and suppress new export orders. 

In Australia and New Zealand the recessions are also deepening as seen by export order declines, falling new housing starts, and increasing unemployment.  This is a song being sung around the world, and it is a sad song reflecting economic blues.

Russia’s ruble began to strengthen against the euro as Russia and the Ukraine continue discussions about the shut-off the gas supplies to Europe through the Russian pipeline. The ruble reached 39.5922 per euro. 

In Asia, other than Japan, the currencies are tumbling in response to the poor economic data coming out of the US and Europe.  Asian economies are heavily dependent on exports and the indications of deepening recessions are dragging down Asian currency prices.  The South Korean won fell to 1,333 won per US dollar.  The Indonesian rupia fell to 10,960 rupia per US dollar.  The Malaysian ringgit weakened to 3.5375 ringgit per US dollar.   The Chinese currency price is quiet right now.

There is one thing to note about 2009 and investor confidence.  Investors really had high hopes that the start of 2009 would bring some good economic news.  As the indicators continue to show deepening recessions it is making investors lose some of their confidence.  This is playing into currency prices such as the Asian currency declines. 

So the last stanza of the economic blues song has yet to be published, but the government song writers are busy working on it.  Stimulus….what stimulus???