Currency Report

G20 Meeting A Group of Twenty (G20) Finance Ministers and Central Bankers met in Cape Town, South Africa on Sunday. From all the nations attending, represented was 90% of the global economy and two thirds of the world’s population and trade. Among topics discussed were development and trade, oil prices, market volatility, currencies, and global growth. Many issues discussed were comprised of rhetoric which has been regurgitated time and time again. US Treasury Secretary Hank Paulson said once again, a strong dollar is in the best interest of the U.S. economy while China was asked indirectly, yet again, to allow more flexibility in its currency. There was an interesting development. Since the yuan is not allowed any flexibility the impact that the weak U.S. dollar has to China is that they may have to buy more debt to keep their currency low to stabilize Chinese exports. Since the yuan is not absorbing any volatility from the weakening dollar, the Canadian dollar and the euro have seen their currencies soar. Canada may be the most sensitive to this as their exports may take the hit as prices soar. Canada’s finance minister Jim Flaherty has made it clear that Canada’s export reliant economy may soon face problems due to the dollar’s decline. Other key points included: - G20 offered little about the global downturn as they took the stance that it will be “difficult to predict.” - A moderation in capacity and resources is expected while rising oil and commodity prices will be important inflationary pressures globally. Traders will have to take a wait and see approach as to how this meeting will impact the markets. British Pound Recent Housing Data has only supported the notion that the British Pound is fundamentally weak. Real estate brokers and agents continue to warn about housing conditions. Many real estate analysts are currently advising to “sell now if you plan to sell soon.” Bank of England Governor Mervyn King used the words “particularly weak” when describing the property market in the U.K. Home values dropped this month in every part of the country except London. Key economic data out of the U.K. this week are the MPC meeting minutes and GDP. The meeting minutes will be very important only if it shows that voting members are starting to vote for cuts. While many have changed their stance from hawkish, David Blanchflower remains the only member to actually cast a vote for any rate cuts this year. If a split decision is reported, the markets may react by pricing in a greater possibility of a rate cut in the December meeting. Canadian Dollar The Canadian dollar has been slowly retracing after hitting all time highs against the U.S. dollar. Canada’s currency has declined 7% since November 7th. Concerns have been looming about the Canadian dollar and its record levels. Canada relies on exports and a strong currency raises the prices of its exports. When these exports become too expensive buyers look elsewhere or just don’t buy at all. Canada is concerned about this and recently has called out China about the flexibility of the yuan. Canada feels it is absorbing too much of the U.S. dollar’s decline. There has been a quick reaction in recent weeks by Bank of Canada officials to stop further increases in the Canadian dollar. Some rumors have been circulating that a rate cut may be the answer. Canada will release wholesale sales, CPI, and retail sales figures this week. These reports may perhaps generate market volatility. Inflation at the consumer level will provide the BOC with some guidance on whether or not they can consider a rate cut. Retail sales will have significance because consumption has yet to show considereable signs of any slowing. Wholesale sales is sometimes a leading indicator of how retail sales will be reported. The retail sales number will provide some insights on consumer confidence. U.S. Dollar Plenty of housing data is on tap this week. The Housing Market Index by the National Association of Home builders will provide measures of demand for single family homes. A low reading of 17 is expected. A number of 50 or higher shows strong demand. Housing starts and building permits is also due out. Housing starts are projected to come in at a 14-year low. Building permits are not expected to be much better with an alarming amount of contracts being cancelled. Wells Fargo & Co. Chief Executive Officer John Stumpf is reported as saying the U.S. housing crisis is the worst since the Great Depression. This is on the heels of the G20 meeting where officials were convinced that the housing slump in the U.S. will get considerably worse. While the housing market will continue to take its toll, traders shift some of their focus towards monetary policy this week. Currently, Fed funds futures are showing a 90% chance of a December rate cut to 4.25%. Speculation now is revolving around whether or not the Fed will cut rates by more than 25 basis points. The FOMC meeting minutes will be released this week which will provide the markets with some indication of the Fed’s intentions. The Fed has been reluctant to raise rates and with inflation on the rise the minutes will be highly anticipated. It should be considered that losses in the dollar may be limited as traders look to reduce dollar short positions ahead of the long holiday.