Sloppy Currency Market

Posted August 17, 2009

US and European economic numbers make it clear the recession is easing but it's far from over. The yen strengthened against most global currencies including the US dollar. The euro rose but is showing signs of weakness as economic uncertainty discourages both consumer and investor confidence.


The recession is apparently easing but it’s not over yet.  That is the conclusion investors came to on Friday as a quick global recovery is clearly not going to happen.  Germany, France and Japan have reported second quarter economic expansions but the good news is not indicative of a sustained period of growth. 

In the US the economy continues to contract though at a much slower rate. Consumer confidence fell in August again despite reports showing US industrial output expanded for the first time since the end of 2008.

The US dollar weakened against the yen to 94.70 yen and against the euro to $1.4175.  The Japanese yen was broadly firmer and strengthened against the euro to 134.35 yen per euro.

The yen also strengthened against commodity based currencies including the Australian and New Zealand dollars.  They yen rose to 77.54 yen per Aussie and to 63.24 yen per kiwi.

The US dollar also rose against the Australian dollar to 83 US cents.

There is a general feeling that recent gains in equity markets were too much and too soon.  Signs an adjustment is going to take place began appearing late Sunday night as investors returned to safe haven assets.

The euro rose against the US dollar but there is no sign of an upward trend at this point.  As one technical analyst with BNP Paribas SA in New York so aptly stated, “The market is in a sloppy pattern...”

There are a number of US economic reports expected this week.  Housing and manufacturing numbers are to be released in addition to auto sales.  Credit markets are beginning to ease as first-time homebuyers take advantage of new government stimulus programs.  The National Association of Realtors will report on sales of previously owned homes also and the number is expected to reflect an increase in sales.

Those green shoots of recovery are still there, but this crop won’t be growing rapidly! 

The UK pound weakened against both the US dollar to $1.6452 and the euro to 85.99 pence per euro.  The UK is in a similar position as the US with increases in housing starts and existing home sales increasing but lack of consumer confidence impacting retail sales.  Until consumers are able to place some confidence in the economy there cannot be a sustained recovery.

In addition, unemployment figures continue to rise.  In the US it is expected that unemployment will reach 10 percent or higher before it begins to drop.  The US unemployment rate is currently at 9.4 percent, and the UK rate is at 7.8 percent for the quarter ending June 2009 and continues to rise also.

US regulators had to close another 5 lenders recently including the large banking operation Colonial BancGroup Inc.  This is proof that weakness in the financial industry still exists and can threaten economic stability.  This leads to investors seeking investment safety such as the yen.  UK Bank of England Governor Mervyn King recently made the statement that the global economies remain in a “deep recession” and banks will need to raise additional capital to shore up balance sheets.