| US Dollar Mixed as Obama Announces Housing Program, Fed Releases Bleak Economic Outlook The US dollar saw a mixed day of trading on Wednesday, gaining against the euro, Swiss franc, and Japanese yen while falling versus the commodity bloc. Based on broad losses for the Japanese yen, the moves signaled slight improvements in risk appetite. There was a flurry of economic releases, as well as news from President Obama and the Federal Reserve. First, US housing starts and building permits both fell by more than 50 percent in January from a year earlier to their lower levels ever, with record keeping having begun in 1955. At the same time, import prices fell negative for the sixth straight month in January while the annual rate hit a fresh record low of -12.5 percent, thanks to a stronger US dollar and lower commodity costs. Additionally, industrial production contracted for the third straight month at a rate of 1.8 percent while capacity utilization hit a nearly 26-year low of 72 percent, as manufacturers slashed output on the back of waning demand. Meanwhile, President Obama announced a $275 billion program that will move to cut mortgage payments by matching reductions lenders make to interest payments to 31 percent of the borrower’s monthly income. The Treasury will also buy up to $200 billion of preferred stock in Fannie Mae and Freddie Mac, and detailed guidelines are due to be released on March 4. Finally, the Federal Open Market Committee's (FOMC) meeting minutes from January yielded few surprises, but in an effort to be more transparent, the central bank started to issue longer-term forecasts for growth, unemployment, and inflation. | NZD managed to hold above the 0.5050 level, reaching around 0.5135 early Europe, in a quiet session for the currency. Consensus forecasts for New Zealand’s trading partners were revised lower again, and will weigh on the RBNZ, interest rates, and the currency. AUD ranged from 0.6340 to 0.6430, which was surprising given the Moody’s report saying the major Australian banks’ ratings may be reassessed in light of the deteriorating outlook. That negative news was best expressed by AUD/NZD, slipping to the lower end of the 1.2470 to 1.2570 daily range. EUR fell a cent during the European afternoon, from 1.2640, the lack of follow through attributed to option levels around 1.25 being protected. Apart from a brief dip to 1.41, the BOE minutes revealing a unanimous vote for future quantitative easing via gilts purchases, GBP hovered around 1.42 for most of the session. USD/JPY touched a technical level at 94, as the Topix banks index almost reached a 25-year low. US housing starts plunge 16.8% in Jan. The recent string of three consecutive 15-16% monthly declines in housing starts has taken the total decline in starts from their early 2006 peak to 80% (the permits decline from their late 2005 peak is 77%). The regional data showed only small pockets where activity might be picking up, such as a 2.5% rise in singles starts in the West (after a cumulative 31% drop in the prior two months!). Unseasonably poor weather in the Midwest and northeast may have weighed on starts somewhat. US industrial production down 1.8% in Jan. The industrial production data showed yet another steep decline, exactly in line with Westpac’s –1.8% forecast, mirroring those falls seen right across the world in recent months now that global trade is grinding to a halt. Auto production slumped a massive - wait for it - 23.4% but there were broad-based declines across most of the industrial spectrum with the exception of defense and utilities. UK CBI industrial survey found much weaker orders and slightly softer expectations for output and prices over the next quarter in its second survey for 2009. Data like these imply that Q1 GDP could contract at an even faster pace than Q4’s –1.5% (which we expect will itself be revised lower). |
| Euro Consolidates Losses, British Pound Remains Range Bound Despite BOE Minutes Signaling BOE Buying of Gilts The euro and the British pound both drifted lower for much of the day Wednesday, with EUR/USD consolidating losses after breaking below key support at 1.2725 on Tuesday while GBP/USD remains contained to a tight range of 1.4150 - 1.4300. There were few key European economic releases, though data showed that Euro-zone construction output failed to rise for the tenth straight month during December. However, the British pound faced major event risk on the release of the minutes from the Bank of England’s February meeting, and immediately plunged to the bottom of its latest trading range. The minutes showed that all Monetary Policy Committee (MPC) members voted for a cut, though David Blanchflower dissented in favor of a more aggressive 100 basis point cut (the BOE only cut by 50 basis points to 1.00 percent), but the more notable factor was that all MPC members agreed that BOE Governor Mervyn King should ask Chancellor of the Exchequer Alistair Darling for permission to buy gilts in order to boost money supply. |
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