[B]Talking Points
• Japanese Yen: nears 106.00 as risk aversion
• Euro: Holds 1.5750 despite weak Retail Data
• British Pound: Soars to 1.9900 as Current Account Improves sharply
• Canadian Dollar: Raw Materials data on tap
• US Dollar: Personal Spending and Income on tap[/B]
Fear is back in the currency markets as yesterday’s -358 point plunge in the Dow was followed by –277 drop in the Nikkei and more 1% decline in the DAX as well. The net result is that USDJPY has fallen more than 200 points in 48 hours and many of the carry trades that have performed so well at the start of the week have come undone.
As we noted earlier, the Fed missed a golden opportunity to surprise the market with a rate hike this week, which no doubt would have hurt stocks but may have also broken the back of oil speculators by strengthening the dollar while making credit more expensive. Instead FOMC’s dilly-dallying produced the worst of all worlds. Oil prices skyrocketed breaking the $140/bbl handle, stocks fell sharply as a result and the dollar continued to weaken not only against the euro, but the yen as well.
On the economic front the news from Japan and Europe was less than stellar indicating that the slowdown is clearly becoming global in scope. In Japan Overall Household Spending – a key measure of consumer strength – fell –3.2% versus –2.0% projected, the worst reading since 2006. In Europe meanwhile Retail PMI hit a low of 44 its worst reading since April as higher prices and massive increases in the cost of energy dampened consumer spending.
The one G-11 country that saw a positive economic surprise was UK. The UK Current Account narrowed sharply in Q1 of 2008 dropping to its lowest level since 2005 from –12.2 Billion GBP to –8.3 Billion GBP. The change was due to a mild improvement in trade of goods but the bulk of the adjustment was due to a rise in surplus of the income account. The pound initially spiked to 1.9900 as traders welcomed the better balance sheet news, but backed off its highs after the realization that income flows rather trade flows were the main reason for the upside surprise. With global equity markets beginning to weaken materially, currency traders doubt that UK will be able to achieve much of a benefit from income flow again.
In North America today, the key event risk lies in the Personal Income and Personal Spending numbers. If income numbers miss to the downside the greenback may see further selling pressure and 1.5800 could give way before the week’s end. If the gap between spending and income widens significantly, the news would suggest that the US consumer is going further into debt trying to finance his day to day expenses. Thus, despite lackluster news elsewhere, the dollar with remain vulnerable on a relative basis as the story in the currency market is quickly becoming a race to the bottom.
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