Com Bloc Dominates Friday’s Docket, New Zealand Dollar Tops Event Risk Next Week

The global economic docket was very light today; but there was still a top market mover for the day: Canadian retail sales. It is hard to forget the massive 5.4 percent drop in the December consumption report last month. After such an aggressive decline, some tempering was inevitable; and that is how the 1.9 percent pick up in January receipts was treated. It was the biggest pickup since July of 2006, with notable increases in auto, food and clothing purchases. Given the trend this data has been through, it will take broader and more significant improvements to generate optimism about Canada’s future.

Looking ahead to next week, an otherwise anemic calendar will be dominated by the typically under-the-radar New Zealand dollar. The top release will be the fourth quarter GDP and current account figures. This is the last of the majors to see its growth numbers; and the forecast isn’t promising. A 1.1 percent contraction through the three month period is expected to slow the annual pace to 2.0 percent – the worst pace since 1991. This will be a critical indicator for the kiwi dollar as the risk appetite wave the currency has shared with its Aussie counterpart is partially based on expectations that the currency is seeing relatively strong growth and rates. The RBNZ hasn’t curbed its cuts; so expectations are high.

Euro, British Pound Lose Momentum Despite Improved Cooperation On Financial Aid

Both the euro and the British pound pulled back through the early morning hours of the US session. However, this retracement wasn’t significant enough to put the massive rallies the two currencies enjoyed over the past two weeks in jeopardy. News out of the region was generally mixed. From the economic docket, the Euro Zone released disappointing industrial production numbers. According to the data, factor output contracted 17.3 percent in the year through January – the most aggressive slump on record. As the regional and global recessions take hold, factories have little choice left but to curb production and fire workers to avoid closing their doors for good. The other market-worthy event risk for the session was news that the EU had reached an agreement to expand aid to its struggling central and eastern neighbors. Though it was not quite the broad bailout of Eastern Europe that Hungary had called for a few weeks ago, leaders agreed to boost funding to the IMF; discuss a loan to Romania (part of their case-by-case bailout effort); and double the credit line to those countries in financial stress to 50 billion euros. Perhaps this is a sign of their openness to negotiate when the G-20 meets two weeks from now.

Foreign Exchange Market Daily Update

The US dollar rally seen yesterday and overnight came to an end as European shares rose and US stock market futures dampened the dollar sentiment. The dollar weakening against a basket of currencies was capped after data showed China's exports in February slid 25.7% from a year earlier, while imports dropped 24.1%. These import and export figures from what is considered an economic powerhouse was a timely reminder on the sickly state of global economic growth, or lack there of.

Recently, news from banks has been one of the factors in guiding investors to shy-away or whet their appetite for riskier assets which push or pull the equity markets. As equity markets perform somewhat better, global risk aversion bid for the dollar may ebb.

The euro strengthened against the dollar touching a two week high overnight, but erased some of those gains after German industry orders fell for the 5th straight month. German manufacturing orders slumped by 8% in January signaling Europe's largest economy may again contract sharply in the first quarter of 2009.

The British pound strengthened against the dollar overnight but most of the gains disappeared in early morning trade. Meanwhile the pound remained near multi-week lows against the euro due to concerns over the UK economy and banking system. Data from the National Institute of Economic and Social Research indicated Britain's economy had shrunk by 1.8% in the three months to February, after falling 1.7% in January. Furthermore, Britain's goods trade gap widened more than expected in January to 7.745 billion pounds from 7.232 billion pounds in December.

The Bank of England will implement its first "quantitative easing" program today by purchasing 2 billion pounds of government bonds. Market players are waiting on signs of the impact of BoE's last ditch attempt to beat off recession by leveling close to 75 billion pounds into the economy. Many are speculating the pound to remain under pressure.

The Japanese yen remains little changed against the dollar. Many analysts had forecasted the yen to strengthen in the next six months but revised their outlook after Japan's economy contracted last quarter by the most in three decades. Since December, the yen has weakened 8.2% against the dollar. With the erosion of Japan's economy, some investors are beginning to question whether the yen deserves the "safe-haven" status.

The Canadian dollar weakened slightly against the US dollar as oil prices dropped. Oil fell below $44 a barrel as evidence for global crude demand declined.

The Australian and New Zealand dollar strengthened against the greenback after initially weakening against the US dollar. As China's exports took a surprising slump, both the Aussie and the kiwi weakened against the greenback. However, those losses were recouped as US stocks rallied.

Korean Won Rises as Asian Stocks Gain

The South Korean won rose for the third day against the U.S. dollar today as some Asian stock markets showed the growth and the high-yielding currencies were favored by the traders.

The majority of the most-traded Asian currencies (except the Japanese yen) showed gains today that can be simply regarded as the correctional movement after one of the worst beginnings of the year. The Korean KOSPI composite index advanced by almost 2 percent today as the investors thought that it was largely oversold recently.

Some analysts go as far as stating that the current month will be the final really bad one for the emerging markets and beginning from April the things will be gradually improving for them. The South Korean won trading near 1,500 per dollar looks very promising if you consider a global recovery soon. The currency was just a good buy, which was supported by the growing stocks today.

Until today there were speculations that the Korean foreign exchange reserves aren’t liquid enough to supply the U.S. dollars whenever the demand arises. The Bank of Korea informed the market participants today that the reserves can be turned into cash anytime to satisfy the demand for dollars if required. More than that, the last currency auction was skipped due the diminishing demand for the greenback.

USD/KRW fell from 1537.5 to 1510.6 as of 6:00 GMT today. It was reaching as high as 1559.0 yesterday.

The yen declined for the third day in a row against the dollar, the euro and the pound today as the Bank of Japan decided to buy the government debt a

The yen declined for the third day in a row against the dollar, the euro and the pound today as the Bank of Japan decided to buy the government debt and the stock markets rose during the Asian trading session.

The G20 meeting resulted in a pledge to a collective easing of the monetary policy and fiscal stimulating of the economies to recover from the ongoing crisis. The markets reacted to this decision with an expected growth, which is always negative for the Japanese yen and the U.S. dollar, as investors continued to seek the assets that would yield more than the near-zero dollar and yen.

According to the general expectations of the market participants the monetary easing will lead to the strengthening of the currencies of the leading emerging currencies in the near term, while the low-yielding U.S. dollar and Japanese yen will have to go down. On the other hand the dollar will probably also rise against the yen, providing the yen will become the short-term carry trade target again.

EUR/JPY rose from 126.02 to 126.81 as of 7:35 GMT today. GBP/JPY went up from 136.45 to 137.83 today. USD/JPY remains virtually unchanged, floating near the rate of 98.05.

Pound Declines before Employment Report

The Great Britain pound declined against the other major currencies today on speculations that the employment report that is scheduled for the release today will show that the situation with labor market is worsening.

Despite the continued gains on the global stock markets and the elevated interest for the high-yielding assets, the pound sterling fell for the first day in five against the Japanese yen and continued its yesterday’s moderate decline against the U.S. dollar and the euro. The market participants expect an increased number of the jobless claims in U.K. from the report that’s released today at 9:30 GMT.

Bank of England Governor Mervyn King said during its late yesterday speech in London that the positive outlook for the consumer price growth may turn the monetary policy back to the bullish trend in the interest rate. Analysts saw this statement as a positive signal for the pound but it looks like the markets aren’t sure about the positive CPI numbers appearing on the horizon soon.

GBP/USD fell from 1.4055 to 1.3966 as of 7:49 GMT today. GBP/JPY went down from 138.73 to 137.66, while EUR/GBP rose from 0.9271 to 0.9305 today.

Euro Declines in Correction Following Rally

The euro fell against the dollar and the yen today following the yesterday’s unprecedented rally as the market participant speculate that ECB will have to follow Fed’s money-printing trend.

The European currency rallied yesterday against the U.S. dollar after the Federal Reserve pledged to buy $300 billion in the U. S. Treasury securities, technically stating that it will print those money. The euro advanced by more than 3.4 percent against the greenback yesterday. Today it’s posting a technical correction supported by the expectations that the next statement by the European Central Bank won’t differ much from the Fed’s one.

The currency rose against the pound, which is considered to be a rather weak player on the currency market (it failed to rally at similarly fast pace against the dollar yesterday). The yen gained for the first time in 6 days against the euro today. Analysts believe that there is a great chance for the ECB to follow Fed’s steps and we may see a backward rally on EUR/USD soon — the next monetary policy meeting for Eurozone is scheduled for April 2.

EUR/USD fell from 1.3490 to 1.3476 as of 7:54 GMT today after rallying from 1.3035 to 1.3490 yesterday. EUR/JPY declined from 129.74 to 128.61 and EUR/GBP rose from 0.9442 to 0.9457 today.

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China's Forex Reserves Drop $30bn In January

BEIJING: China's foreign exchange reserves, the world's largest, fell by about $30bn in January, partially due to a drop in the value of non-dollar assets, Chinese media reported Wednesday.

The report in the China Business News, which cited an unnamed source, did not specify the size of China's foreign exchange reserves at the end of January.

China's foreign exchange reserves stood at $1.95 trillion at the end of last year. The central bank is scheduled to release quarterly figures of reserves in mid-April.

China's foreign exchange reserves fell $25.9bn in October, the first drop since December 2003, according to earlier reports.

China is believed to have invested the bulk of its reserves in assets denominated in US dollar-denominated assets, such as safe but low-yielding US Treasury bonds, but has been working to diversify to improve returns.

China may have lost more than $80bn of its foreign exchange reserves after buying into equities just before world markets collapsed last year, the Financial Times said Monday.

World Bank proposes forex use to tide over recession

aking a leaf out of China’s economic growth history, World Bank chief economist Justin Yifu Lin today said India should use its forex reserves like the Chinese Government did in the 1990s to tide over the economic downturn.

“In the present scenario when we are witnessing deflationary trends in the domestic economy, using forex reserves to trigger demand and growth will be a good step. We can also overrule the possibility of rise in Inflation due to this money supply in this environment. In short-term, the country will see some depletion in reserves, but in the long-term, as the economies around the world revive, India will be poised to export more and generate more forex revenues,” Lin said at a press conference here on Friday.

“The downturn is the cause of excess capacity in the system, developing countries were innocent but will be hurt seriously and poverty, unemployment will be big issues,” he said. “Big investments in infrastructure in developing countries by industrial countries could pave the way for eventual recovery and a resumption in demand,” he said.

“The government should invest in projects to that will increase revenue and pay back in future. Investments in energy, infrastructure and power projects can not only cut excess capacity but will also increase demand leading to a revival,” he said.

“Making fiscal stimulus plans work by releasing bottlenecks to growth in developing countries offers a potential win-win solution,” Lin said. Such investments, he said, will not only increase demand, but also their growth, and the government revenues, which in turn will enhance overall demand.

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Yen Falls Versus Dollar as Japan’s Current-Account Gap Balloons

March 9 (Bloomberg) -- The yen declined against the dollar and euro as Japan posted its first trade deficit in 13 years, reducing the currency’s appeal as a refuge.
Britain’s pound slipped below $1.38 for the first time since January after the government took a majority stake in Lloyds Banking Group Plc, the biggest U.K. mortgage lender. The dollar rose against 15 of the 16 most actively traded currencies as investors sought safety in the world’s reserve currency.
“The worst trade data on record and first current account deficit posted in 13 years derailed the yen,” said Jack Spitz, managing director of foreign exchange at National Bank in Toronto. “There’s Japanese yen weakness and British pound weakness. You can take your pick on which will do worse.”
The yen weakened 0.8 percent to 99.02 per dollar at 10:08 a.m. in New York, from 98.25 on March 6. Japan’s currency depreciated 0.6 percent to 125.04 per euro from 124.34. The euro fell 0.3 percent to $1.2617 from $1.2653.
Japan, the world’s second-biggest economy, recorded a current-account deficit of 172.8 billion yen ($1.76 billion) in January, the Finance Ministry said in Tokyo. The deficit was the widest since January 1985, the earliest year for which there are comparable data.
Futures traders decreased bets that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so- called net longs -- was 20,070 on March 3, compared with net longs of 28,635 a week earlier.
Dollar Index
The Dollar Index, which the ICE uses to track the greenback’s performance against the currencies of six major U.S. trading partners, rose 0.8 percent to 89.218. The index touched 89.624 last week, the highest level since April 2006.
The MSCI World Index lost 0.9 percent today, while the Standard & Poor’s 500 Index increased 0.4 percent after declining the most last week since November.
The pound fell against all of the 16 major currencies after Lloyds Banking Group ceded control to the government in return for state guarantees covering 260 billion pounds ($367 billion) of risky assets. Sterling lost as much as 2.5 percent to $1.3743, the lowest level since Jan. 26, and dropped 1.7 percent to 91.28 pence against the euro.

Euro, Pound Finds Support Despite Declining Manufacturing Activity, Bernanke To Speak

The Euro accumulated over 100bps in gains through overnight trading as equity markets looked to rebound after a week of risk aversion. The first increase in German consumer prices since July, 2008 added further evidence that prices are beginning to stabilize. However, the remainder of the economic docket provided more evidence that the European recession is deepening. Indeed, German exports fell by 4.4% which was the fourth straight month of weakness, which led to an increase in the trade balance to 8.5 billion from 7.3 billion. Meanwhile, French manufacturing fell 4.1% in January bringing the annualized decline to 16.5%. A 15% drop in consumer goods was the main cause of the decline as the deepening recession continues to lead to consumers retrenching. The Euro’s strong correlation to risk appetite was evident today as the single currency gained despite weak fundamental data and ECB member Lorenzo Bini Smaghi dovish comments. The policy maker stated that “If the (economic) situation worsens, the ECB is ready to reduce rates further, even to zero,” in an interview with German business paper Boersen-Zeitung. This is a departure from the consistent rhetoric from the central bank that a zero interest rate policy wasn’t a possibility. He would go on to say that increased deflationary pressure would be the main cause of such an aggressive move. Although the increase in German prices makes that scenario less likely, a drop in Chinese prices could filter through to the global economy and raise those concerns again. Meanwhile, Bundesbank President Axel Weber is on the worse stating that the German economy is expected to be hit worse than expected by the global downturn which could lead to heavy Euro trading. The 20-Day SMA at 1.2701 has provided resistance again for the euro/dollar which could leave the pair open to a retrace during U.S. trading.

Aussie Rises as RBA Leaves Rate Unchanged

The Australian dollar went up against all other major currencies today after the country’s central bank decided to leave the policy interest rate unchanged, unexpectedly stopping its most aggressive rate-cutting streak.
The Reserve Bank of Australia left the rate unchanged at 3.25 percent today for the first time in seven month, stating that the record low interest rates and the government’s spending are already helping the national economy to recover. The Aussie rose against the U.S. dollar, the Japanese yen, the Great Britain pound and the euro.
The analysts expect also a positive outcome from the tomorrow’s report on the fourth quarter GDP growth in Australia. The median forecast is at 0.2 percent advancement, which compared to the other developed economies is quite good. The traders believe that the current growth of AUD is sustainable in the short-term and it will probably last for several weeks.
AUD/USD rose from 0.6291 to 0.6431 as of 8:57 GMT today. AUD/JPY advanced from 61.06 to 62.92; AUD/NZD went up from 1.2775 to 1.2877. EUR/UAD declined from 1.9951 to 1.9652 today.

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US dollar is becoming a real gold in kerb market

The Karachi Stock Exchange: For a short-term period US dollar has a great increase. For this time the US dollar went up to 70 paisas against the rupee in the open currency market that was hold on Tuesday to close at rupee 79.20 for buying and rupee 79.50 for selling.
Interestingly that such a high rate was the demand for dollar while open currency market activities. Amazingly a rush for dollar provoked some exciting events in the open currency market. For example, one moneychanger being there said he was buying US dollar at Rs 79.50, but he had closed selling. What’s more another famous exchange company announced they were just buying dollars but not selling. A leading moneychanger pointed out “Today people are mad about dollar. It’s a kind of common panic. People have heard from somewhere that some bank is going to come to ruin, so they are taking back their money from banks and in a fussy way buying dollars from us.”
Interbank market report: The US dollar increased to Rs 78.70 in the interbank market on Tuesday from rupee 78.35 level observed on Monday.
“We are making just payments but we can’t see any inflows,” noted a senior treasury public officer at a large local bank. “We should admit the fact that the interbank market has some evident problems to meet customers’ demand for US dollar, which is pushing the dollar rate higher.”
He also admitted the situation was ‘hard’ as the central bank couldn’t support the domestic currency via injections following the exhaustion of resources in foreign exchange reserves.
Meanwhile last week the State Bank had reported that Pakistan’s foreign exchange reserves dropped by 690 million dollars to 8.13 billion dollars in the week that came to an end on September 27. Currently the reserves are about half the size of the record 16 billion dollars to add the level seen in October in 2007. The country’s foreign exchange reserves are keeping to decrease because of growing imports, congested exports and run-out of foreign investment from stock markets. Analytics say that reserves may drop further if the country imports cotton production and manure. Asian Development Bank gave a 500 million dollar lend last week. This amount is likely to help to foreign exchange managers but currently they require some more funds.

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Asia Forms Forex Pool

After nearly six months of currency depreciation, the nations of Asia have finally been spurred to action. Japan, China, and South Korea have joined together with the 10 ASEAN economies to form a $120 Billion pool of foreign exchange reserves, which contributors can tap into to protect their currencies. The goal is to prevent capital flight and currency weakness from engendering the same kind of financial crisis that only 10 years ago ravaged Asia. Fortunately, this time around, the 13 countries possess a combined $3.6 Trillion in reserves, which can be deployed in forex and securities markets in order to restore investor confidence. Ironically, the bulk of these reserves belong to China and Japan (who are also funding a large portion of the forex pool), both of whose currencies remain strong in spite of the crisis. Bloomberg News reports:
The fund is aimed at ensuring central banks have enough to shield their currencies from speculative attacks such as those that depleted the reserves of Indonesia, Thailand and South Korea during the 1997-1998 financial crisis.

FOREX NEW YORK SESSION

The price action was mixed in NY trading as the flows around tomorrow's month end continue to be volatile. US stocks shed another -1.5% in broad terms as details of Obama's massive budget and $1 trillion in proposed tax hikes led shares lower. The 7-year Treasury bond auction, the first since the early 1990s, was described as sloppy though the bid/cover of 2.1 suggests demand for US paper remains robust. Bonds were lower as demand for higher yields drove prices down. The 10-year rate added 7bps to near 3.00% while the 2-year was pretty flat at 1.08%. Gold lost another -$7 towards 946 as profit taking continued. The precious metal briefly tested 935/930 support and this is expected to be an interesting level as we head into the weekend.

EUR/USD edged about -50 pips in NY trading as failure to take out the 1.28 barrier put downside pressure on the pair. The 200hr SMA by 1.2710 and hourly trendline by 1.2670 now look like the next barriers to further weakness. USD/JPY was bid more than 30 pips despite the weakness in stocks as the yen safe haven myth continues to evaporate. The pair was sitting near the 98.50 pivot at the NY close and 99 looks like the next hurdle in the rally. USD/CAD surprisingly jumped about 95 pips to 1.2530/40 despite the pop in oil prices to near the $45/bbl level. Look for this correlation to resume once the murkiness around month-end subsides next week.