The global economy is liable to deteriorate further in the short-term. There will be renewed fears over the financial sector and speculation that further government support will be required for the banks. Risk appetite will, therefore, remain fragile in the short-term, but there should be scope for stabilisation given the continuing policy action. With all major economies in difficulties, it will be difficult to secure decisive currency trends.
Key events for the forthcoming week
Date |
Time (GMT) |
Data release/event |
Tuesday January 20th |
14.00 |
Canada interest rate decision |
Friday January 23rd |
09.30 |
UK GDP (Q4) |
Dollar:
The US economy will continue to weaken sharply in the near term as unemployment continues to rise rapidly. The Federal Reserve will maintain a highly expansionary monetary policy to help underpin conditions. Attention will turn towards economic measures by the new Administration with a particular focus on the fiscal package. There will be expectations of a recovery late this year which will provide some US currency support. There is also scope for some further near-term defensive dollar demand as the global economy continues to deteriorate. The overall US currency fundamentals will still be very weak.
The dollar maintained a firmer tone against the main European currencies over the week and pushed to a one-month high against the Euro. The US currency gained some defensive support as risk appetite was lower, but weakened from its best levels.
Financial-market stresses were an important focus as fear became the dominant feature once again. There was further speculation, for example, that the Bank of America and Citigroup would require additional government support to survive. On Friday, the US Treasury announced that Bank of America would receive US$20bn in equity. The Senate also approved the second US$350bn TARP tranche.
The US economy continued to have an important influence on market sentiment. Retail sales data was even weaker than expected with a sharp 2.7% decline for December, the sixth successive decline, while underlying sales fell even more sharply by 3.1%. Given that the November data was also revised weaker, fears over the consumer spending outlook continued to increase.
The New York manufacturing PMI survey strengthened to -22.2 for January from a revised -27.9 the previous month and there was a similar pattern for the Philadelphia Fed index with an improvement to -24.3 from -36.1. The data suggested that the rate of decline in the manufacturing sector may be easing, but there will be unease over unemployment as the Philadelphia Fed employment index was at a record low.
Jobless claims rose to 524,000 in the latest week from 470,000 the previous week. In contrast, the number of continuing claims fell back after last week’s sharp increase.
The US trade deficit was sharply lower than expected with a decline to US$40.4bn for November from a revised US$56.7bn the previous month and this was the lowest figure since November 2003. Exports fell by over 5.0% over the month while there was a very steep 12% decline in imports. Crude oil imports declined by US$15bn for the month, but underlying imports were also extremely weak.
The Fed’s Beige Book reported that economic conditions had weakened further in the last month. Credit quality also remained a concern while layoffs continued in most districts. Fed Chairman Bernanke continued to express major concerns over the economy with comments that further bank bail-outs may be required. The structural vulnerability was also illustrated by a US$83bn Federal budget deficit for December compared with a US$45bn surplus last year. |