Here is a video interview I conducted with Marketwatch talking about where the US dollar is headed in 2009:
The Bank of Canada took interest rates to a 50 year low this morning of 1.5 percent and signaled that further monetary stimulus may be needed. Their next rate decision is on January 20th and there is a strong chance that the central bank will take interest rates down to 1 percent. According to the Bank of Canada monetary policy statement, global growth deteriorated significantly, inflation has slowed more than forecast and spending is decreasing on both the corporate and consumer level. The weakness of the Canadian dollar is helping but not enough to make the central bank feel confident that their 250bp of easing year to date will be sufficient to stabilize the economy. The BoC is telling us that more needs to done. The automobile and commodity industries in Canada has been dealt a double blow from slower growth and falling oil prices.
The Canadian dollar has sold off aggressively following the larger interest rate cut of 75bp. USD/CAD is back in the buy zone according to our Bollinger Bands and could hit 1.2875 which would open the door for a retest of 1.30. If the currency pair does not hold above 1.2670, which is the first standard deviation Bollinger band, the attempt to enter the buy zone has failed and the triple top remains in place.
If the equity market managed to rally despite news that 533k jobs were lost from the US economy last month, then Obama’s pledge to increase spending this weekend and the developments for the Big 3 automakers will only help. Risk appetite appears to be slowly returning to the markets with the low yielding US dollar and Japanese Yen losing ground to higher yielding currencies such as the Euro, Australian and New Zealand dollars.
Aid is on the Way
The market’s immunity to bad news suggests that everyone is tired of hearing the obvious, which is that the US economy is in bad shape and will worsen before it improves. It appears that all of the weakness in the first half of the 2009 is priced in and instead investors are latching onto the stimulus plans for hope that they will help to trigger recovery in the second half of 2009. This weekend, President-elect Barack Obama laid out his plan to create or preserve 2.5 million jobs . His focus is on infrastructure – upgrading public buildings to make them more energy efficient, building roads and highways and modernizing school buildings. He is hitting the ground running and is expected to announce a $500B to $700B stimulus plan in the first days of his administration.
At a time when uncertainty about the US economy is at elevated levels, the prospect of a major stimulus package and a decision on aid for the Big 3 automakers is helping to improve investor sentiment. The Big 3 automakers have dominated the headlines for the past few weeks and regardless of whether GM and Chrysler will be forced into bankruptcy, the markets will be relieved that there is a resolution.
Of course, there is still plenty of reasons to be skeptical about the rally in currencies and equities. The layoffs keep coming in as Dow Chemical announces an 11 percent reduction in their workforce, which translates into 5000 jobs. Bonus cuts, salary freezes and warnings about earnings have also become the norm.
But it is important to realize that equities and currencies have become extremely oversold in the past few weeks and the lack of any major US economic data until Thursday is helping to fuel the recovery. I think that we are witnessing a bear market rally and that we have yet to hit a long term bottom.
Here is the video of President-elect Barack Obama laying out key parts of Economic Recovery Plan:
In less than 24 hours, we have interest rate decisions from 3 countries:
1. New Zealand
2. United Kingdom
With the global easing cycle in full swing, rate cuts are expected all around. New Zealand and the UK have been two of the most aggressive countries when it comes to cutting interest rates. At their last meetings, the RBNZ delivered a 100bp rate cut while the UK delivered a 150bp cut. In contrast, the ECB has been the least aggressive next to the BoJ who don’t have much room to cut to begin with. The RBNZ and BoE’s commitment to lowering interest rates is one of the main reasons why the Euro sold off against the New Zealand dollar and British pound today. The BoE’s heavier hand has driven EUR/GBP back towards its record highs.
UK Service, manufacturing and construction PMI reports are all at record lows, reflecting the deep slowdown in the UK economy. There is a risk of a 125bp rate cut if the Bank of England continues to be proactive. Since their next interest rate cut will certainly not be their last, they may decide to do more now than later.
Although weak economic data may have the European Central Bank considering a 75bp instead of 50bp rate cut, they have a track record of underdelivering when it comes to monetary easing. A 75bp rate cut would be largest in the ECB’s history.
Here’s a look at what is expected for the upcoming meetings.
Reserve Bank of New Zealand – 150bp Cut Expected on 12/03
The Reserve Bank of New Zealand cut interest rates rates by a full percentage point in October, citing “ongoing financial market turmoil and a deteriorating outlook for global growth. In a statement published in an article released by the RBNZ, the bank notes that “global developments have proven extremely disruptive and it will likely be some time before financial market conditions normalize. The Bank will continue to adopt measures as needed to maintain the stability of our financial system as far as possible in these difficult times.”Once again we see some very dovish statements made explicitly from central banks. The recession embattled country has plenty of ammunition as rates are at the very high level of 6.50%. While zero percent interest rates may not be a possibility, it is possible that we will be surprised by some extremely aggressive cuts. The market currently expects the RBNZ to cut as much as 1.5 percentage points in December and eventually take interest rates down to 5 percent. It is also important to note that rates have not fallen below 4.50% in the last ten years.
Bank of England – 100bp Cut Expected on 12/04
The Bank of England has been the most aggressive and proactive of the G-10 central banks in their attempts to ease monetary policy. The most recent cut of 150bp was a huge surprise to all traders and represents the largest single meeting cut to occur for any of the major central banks during the financial crisis. However what was even more shocking was the fact that the minutes from the most recent monetary policy meeting in early November suggested that they considered an even larger interest rate cut. Going into the December monetary policy decision, the market expects the BoE to ease by another 100bp. With the economy in a recession according to UK officials, interest rates could fall as low as 1% if the crisis continues well into the New Year. The BoE’s ability to cut by such a sizable amount was also reflected in the fact that inflation, once the primary concern, has eased considerably in the last few months. In addition to monetary stimulus, the UK government has been at the forefront of bank bailouts and fiscal stimulus.
European Central Bank – 50bp Cut Expected on 12/04