Mixed Performance in the Foreign Exchange Markets

Published October 4th, 2009 - 03:29 GMT

Mixed Performance in the Foreign Exchange Markets
The foreign exchange markets were mainly driven by job reports from the United States and the Euro Zone and by Ben Bernanke’s testimony to the US Congress. The major currencies witnessed mixed performances against the US Dollar during the week; the greenback ended the week on a relatively stronger footing, nonetheless, regaining some of its safe-haven luster as worries about the global economic recovery increased. The Euro traded between 1.44800 and 1.4720, and the Sterling between 1.5770 and 1.6125. The Japanese Yen shortly dipped to the 90.40 level, but came back on Friday to the 89.00 area to close the week at 89.57. The Australian Dollar moved around the 0.8650 level, with a low of 0.8560 and a high of 0.8860. Finally, the Swiss Franc dropped to the 1.0450 levels from 1.0270 due to fears of further intervention from the Swiss National Bank. Commodities were quiet in general, as oil settled close to the $70 level and gold prices closed around $1,000.
Bernanke’s Testimony on Regulatory Reform
The Federal Reserve Chairman, Ben Bernanke, discussed ways of improving the financial regulatory framework in order to ensure better protection against systemic risks. First, he said that a new council of financial regulators should be established to work with the Fed in monitoring and identifying the big-picture risks threatening the financial system, as this may exceed the capacity of any individual supervisor. He added that all systemically important financial firms should be subject to effective consolidated supervision, whether or not these firms own banks. Additionally, a new special resolution should be created to allow the government to wind down a failing systemically-important financial institution whose collapse could pose substantial risks to the financial system and the broader economy. Bernanke added that these institutions should face a costly combination of higher capital requirements, tougher regulation and higher insurance premiums “making it less profitable to be too big to fail”. This plan is designed to prevent a repeat of the expensive bail-out of AIG and the costly failure of Lehman Brothers.

The Employment Report, 26-year high at 9.8%
The ADP private sector payrolls revealed that private US employers cut 254,000 jobs in September, more than the expected 210,000. Weekly jobless claims climbed to 551k applications from 534k the previous week. The non-farm payroll report was the most disappointing among the labor data, whereby US employers cut 263,000 jobs in September, defying expectations for an improvement to a loss of 180,000 jobs. Finally, unemployment reached a 26-year high at 9.8% in September, versus 9.7% in August.

Mixed Data
On the manufacturing front, the Institute for Supply Management (ISM) Manufacturing Index dropped to 52.6 in September, against the forecasted rise to 54.0 and the Chicago Purchasing Manager’s Index (PMI) sharply dropped to 46.1 in September from 52.9 in August; a reading below 50 indicates a contraction. Both reports have sent a wave of mixed signals vis-à-vis the economy.
Despite the overall weak data which continues to weigh on the US economic outlook, numbers revealed that the US economy shrank less in the second quarter of 2009 than previously thought, as the final release of Q2 GDP revealed an improvement to -0.7% from -1.0% in the previous reading. This revision might be an indication that the economy is moving in the right direction.
Employment in the Euro-zone, 10-year high at 9.60%
The Euro-zone unemployment has edged up to its highest level in more than 10 years reaching 9.60%. Unemployment in the 16-country region increased in August by 165,000 to 15.2 million, in line with the previous three months, but sharply lower than a year back whereby job losses averaged about 400,000 per month, indicating that government policies are curbing steep rises in job losses by encouraging reduced working hours. Unemployment rates varied between the euro-zone countries, with the worst figures in Spain, rising to 18.9 %. In Germany, the rate has held steady at 7.7% for the past three months.
Other numbers
The Euro-zone manufacturing activity contracted less sharply than initially expected, with the Manufacturing PMI rising to 49.3 in September from 48.2 in August. This number is still below the 50 mark that separates growth from contraction; however, it boosts hopes that the worst of the battered economy is behind.
In Germany, retail sales dropped by 1.50% in August from a gain of 0.70% in July, indicating that consumers in Europe’s largest economy remain cautious.
United Kingdom
The UK’s economy contracted at a slightly lower pace in the second quarter than was previously reported, setting the return to growth back on track for the third quarter. GDP shrank by 0.60% against the previous estimate of a 0.7% decline mainly due to better than expected performance in the construction sector.
On the Manufacturing part, the Purchasing Manager Index (PMI) slipped slightly in September to 49.5 from 49.7 in August.
Deflation Deepens
The Japanese deflation hit record levels as weak consumer demand hit prices sharply along with a sharp fall in oil prices from a year earlier, pushing the country deeper into its second spell of deflation this decade. Consumer price Index (CPI) dropped to a record 2.10% in August and the core CPI, which excludes volatile food and energy prices, fell by 0.90%.
Japan’s jobless rate pulled back from a record high in August but job availability remained at a record low, reinforcing views that it will take time for the job market to recover despite a pick-up in corporate activity. The unemployment rate fell to 5.50% from 5.70% in July, against an expected rise to 5.80%
Dinar at 0.28675
The USD/KWD opened at 0.28675 on Sunday morning, following the Dollar performance the previous week.

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