Weekly Money Market Review with IBQ: Large swings in currency markets

February 04, 2013 - 12:18:09 am

The US Federal Reserve Bank kept its monthly $85bn bond-buying stimulus plan, and repeated a pledge to keep purchasing securities until the US employment levels improve significantly. It also kept overnight interest rates near zero since the financial crisis started and tripled its balance sheet to about $3 trillion through bond-buying programme, under which it currently purchases $45bn of longer-dated Treasuries and $40bn of mortgage-backed bonds a month. The Fed’s commitment to loose monetary policy pushed the dollar to a one-year low against the euro reaching a high of 1.3711, alongside the Feds Loose policy the euro maintains its strength supported by last month’s ECB President Mario Draghi’s upbeat assessment of the eurozone health that has dampened hopes for any further interest rate cuts.

The euro started the week at 1.3460. The single currency then advanced against the US dollar reaching a 15-month high of 1.3711 before settling down and closing for the week at 1.3640. The sterling pound endured a volatile week. Cable opened the week at 1.5800, only to drop to 1.5676 after disappointing economic data, The Sterling Pound then recovered to 1.5878 only to lose steam and closed for the week at 1.5693 level. The Japanese yen opened the week at 90.90 weakening against the dollar throughout the week, to touch a two and a half year high of 92.96. The yen’s weakness was supported by the Bank of Japan’s big fiscal spending and open-ended monetary easing policy that would be in effect from January 2014, aiming at doubling Japans inflation target to two percent. The Swiss Franc opened the week at 0.9274, only to strengthen against a weakening dollar reaching a high of 0.9019, The Swiss franc closed the week at 0.9077.

The US Commerce Department announced last week that overall orders for durable goods increased 4.6 percent in December compared with November. The gains were led by a 56.4 percent increase in military aircraft orders and a 10.1 percent increase in commercial aircraft orders. Yet orders for core capital goods, a key measure of private-sector business investment, only rose a 0.2 percent despite market uncertainty over the fiscal cliff, which had been scheduled to kick on January 2013. The US Congress ultimately struck a last-minute deal to avoid or postpone most of the austerity measures.

The US Pending Home Sales Index, based on contracts signed last month, fell 4.3 percent to 101.7 in December from 106.3 in November but is 6.9 percent higher than December 2011 when it was 95.1. The drop was attributed to supply limitation, as it appears to be the main factor holding back contract signing in the past month. Market analysts are expecting that the housing market will remain the economy’s bright spot, and is it expected to support growth this year.

The US Consumer Confidence Index fell in January to 58.6 from an upwardly revised 66.7 in December, erasing all of the gains made through 2012. Consumers are more pessimistic about the ongoing economic outlook and, in particular, their financial situation after the latest increase in the payroll tax.

Gross domestic product dropped at a 0.1 percent annual rate, weaker than any economist forecast and the worst performance since the economy emerged from recession in 2009, but analysts said there was no reason for panic given that business investment and consumer spending and picked up. The large drop in the gross domestic product was due to slower inventory growth and the largest drop in defence spending in 40 years, other than that the economy would have grown at a reasonable 2.5 percent rate. In addition, analyst said Superstorm Sandy that struck the east coast in late October might have reduced the index by 0.5 a basis point. Economist say a growth pace in excess of three percent would be needed over a sustained period to significantly lower high unemployment.

The non-farm payroll numbers for January came out at 157,000, missing the forecast of 161,000 while unemployment rate rose by 0.1 percent to read 7.9 percent. The report also showed an increase in hourly earnings and a solid gain in retail and construction employment.

 

Europe

Loans to households and companies in the 17-Nation Euro Region contracted for the eighth month running in December. European Central Bank data showed that loans to the private sector fell 0.7 percent from the same month a year ago after dropping and annual 0.8 percent in November. Lending remains weak, in spite the fact that the ECB has cut interest rates to a record low of 0.75 percent and pumped more than ¤1 into the banking sector. The cheap funds the ECB is pumping through the monetary system are not reaching businesses and households evenly across the eurozone, market data showed that the private sector lending in Spain dropped by ¤22bn also in Portugal it fell by ¤2.6bn, while on the other hand Italy posted a rise of ¤12.6bn. Eurozone M3, a general measure of cash in the economy, slowed to annual growth of 3.3 percent in December from 3.8 percent in November.

Spain’s recession deepened in the fourth quarter, as its austerity programme hammered public spending and weak domestic demand exerted pressure on the country to seek international aid. Spain’s GDP fell 1.8 percent in the fourth quarter from a year earlier, the data came worse than economists’ forecasts for a fall of 1.7 percent. Also on a quarterly basis the economy contracted by 0.7 percent down from 0.3 percent in the previous quarter, also below economists’ forecast for a drop of 0.6 percent.

Germany’s unemployment unexpectedly declined in January. It fell by 16,000, taking the jobless rate down to 6.8 percent, not far from a post-reunification low. However, the positive development of the labour market was over shadowed by the retail sales that had dropped by its largest amount in over three years in December and a new forecast by the HDE retail association showing it expects sales to fall in real terms in 2013.

The Peninsula

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