NBK Weekly Money Markets Report
Greenback Gaining Back Momentum
The downward trend of the US Dollar against its counterparts seems to have ended last week, with the greenback strengthening against most of the major currencies. This shift was mainly caused by a negative sentiment in the markets, which spurred the demand for the safety of the US Dollar. The Euro was one of the major losers last week, dropping by 6 big figures. The 16-region currency started the week around 1.3300, but was heavily sold before the FOMC meeting on Tuesday. The downtrend continued for the remainder of the week, with the currency reaching a low of 1.2750 on Friday. The Euro did not recoup any of its losses even after the encouraging GDP figures on Friday, and closed at 1.2754. The Sterling Pound weakened also against the US Dollar, dragged mainly by the Bank of England’s negative inflation report. After reaching a high of 1.5996 on Monday, the Pound had a free fall to a low of 1.5562 on Thursday, and ended the week at 1.5592. The Swiss Franc was less volatile than the other major currencies, and range traded between 1.0624 and 1.0460, and closed at 1.0510. The Japanese Yen started the week at 85.50 and was able to reach a low of 84.73 on Wednesday. Markets were awaiting an intervention by the Bank of Japan in case the currency strengthens further, because of the negative effects a strong currency can cause to the exports and the economy as a whole. The Yen closed at 86.20.
Quantitative Easing 2
The Federal Open Market Committee (FOMC) held their latest policy meeting last week, and as widely expected did not change their fed fund rate from its current range of 0% to 0.25%, and also reiterated its pledge to keep them at record low for an extended period. But the main event that markets were looking up to wasn’t the interest rate decision, but rather the announcement of a new quantitative easing program and its effect on the economy. The FOMC announced a new plan to reinvest the proceeds from maturing securities acquired through its $1.25 trillion mortgage-backed-securities (MBS) program into treasury bonds. The decision to reinvest these proceeds, which constitutes an effort to keep borrowing costs down, represents a significant policy shift for a central bank that has been debating an exit strategy from the previous stimulus program just a few months ago, and is a clear indication that the economy is not picking up the way the central bank had thought a while back.
Jobless Claims Still Rising
More Americans have filed applications for unemployment benefits last week, showing that firings stepped up as the economy slowed. Initial jobless claims rose to 484,000, the highest level since mid February. Initial claims have risen three times in the past four weeks, suggesting that companies are going back to cutting jobs after losing confidence in the recovery and becoming hesitant to hire, raising the risk of further erosion in consumer spending, which constitutes the biggest part of the economy. State and local government layoffs are also likely contributing to the increase in these unemployment claims.
CPI & Retail Sales
Consumer Price Index rose 0.3%, largely in line with expectations. Higher energy costs helped lift the consumer prices in July, which was the first rise in four months.
U.S. Retail Sales rose in July to 0.4% compared to a drop in June of 0.3% in a hopeful sign for the economy, but the gains were concentrated in auto and gasoline station sales, suggesting underlying momentum in consumer spending remains subdued.
Industrial Production Unexpectedly Declines
European industrial production unexpectedly declined in June, led by a drop in durable consumer goods such as furniture and home appliances. After a 1.1% increase in May, industrial production dropped 0.1% in June, and disappointed market expectations for a 0.6% rise. In Germany and France, the Euro zone’s two largest economies, production dropped by 0.5% and 1.6% respectively. With consumption levels remaining subdued and high unemployment, the overall growth in the Euro zone is increasingly reliant on the industrial sector, and this drop raises fear that the regional economic growth may not be as high as anticipated.
European Economy Expanding
Euro zone gross domestic product (GDP) grew at its fastest pace in more than 3 years in the second quarter of 2010, but concerns remain that the rebound could weaken. Figures showed that the GDP in the 16-nation region expanded by 1.0% quarter-on-quarter, and by 1.7% compared to the same quarter of last year. These figures are the highest for the past 4 years and show that growth in the Euro zone outpaced that of the US in the same period. These figures were mainly boosted by Germany and France, where the quarterly GDP came out at 2.2% and 0.6% respectively. The main drag was Greece, where GDP contracted 1.5% in the period.
Quarterly Inflation Report
The Bank of England, in its latest inflation report, revised its growth expectations downwards as Governor Mervyn King warned of a “choppy recovery” ahead and that the UK economic outlook is weaker. Mr. King warned that households will also be hit by tighter credit conditions as banks address their balance sheets and reduce lending. The governor also warned that inflation is likely to stay above the Bank’s 2.0% target until the end of 2011 because of the planned hike in VAT in January. Moreover, the Bank downgraded its GDP forecasts for 2011 from 3.4% in May to about 2.5%, with a rise to 3% in 2012. Mr. Mervyn King added that there was great uncertainty over the outlook for the US as well as the Eurozone, the UK’s biggest trading partner, hampering efforts to build an export-led recovery.
Job Market Recovery
Unemployment in the United Kingdom fell as the economy added workers at a fast pace, indicating a recovery in the labor market just as the government prepares to enact severe spending cuts. Unemployment, as measured by International Labour Organization methods, declined 49,000 to 2.46 million in the quarter through June, the biggest drop since 2007. The quarterly increase in total employment was mainly driven by part-time workers which increased by 115,000 to reach 7.84 million, the highest figure since records began in 1982. The unemployment rate stands unchanged at 7.8% in July. Prime Minister David Cameron is counting on private companies to keep creating work as his coalition government discharges thousands of public-sector jobs to help eliminate the record deficit.
Around the World
Bank of Japan Meeting
The Bank of Japan (BoJ) refrained from changing its monetary policy during their meeting last week. The policy board headed by governor Masaaki Shirakawa kept the benchmark overnight rate unchanged at 0.10% and maintained its credit programs by a unanimous vote. However, Japanese executives and politicians have voiced concerns in the past week about the strength of the Japanese Yen against the US Dollar, which is approaching a 15-year high, saying that it threatens an already weakening economic recovery. A stronger Yen could severely affect Japanese exports, which constitute a cornerstone of the local economy, making them more expensive and thus less attractive. Policy makers stated that the central bank may provide stimulus should uncertainty about the global economy shake currency markets further.
Unemployment Rising in Australia
Australian employment slowed in July, driving down the nation’s currency as investors bet the Reserve Bank of Australia will slow the pace in its aggressive interest rate increases. The number of people employed gained 23,500 from June, numbers from the statistics bureau showed last week. The unemployment rate rose to 5.3% in July, from an earlier 5.1% recorded in June, as the number of people entering the labor force outpaced growth in new jobs.
Dinar at 0.28820
The USDKWD opened at 0.28820 on Sunday morning.