- The dollar fell on Wednesday despite a late selloff on Wall Street. The Federal Reserve's Beige Book showed weak consumer spending during late summer and early fall. However, many sectors of the economy either stabilized or improved modestly the last six weeks. The pickups, though, often were from depressed levels of activity, the Fed said. The S&P 500 index, reversing earlier gains in the late selloff, fell 9.66 to 1,081.40. The yen declined modestly. Toyota and Honda said they move production oversea as the high yen makes Japanese produced cars uncompetitive. The euro climbed above the 1.50-handle for the first time in 14 months. The Australian dollar rose as Australia's leading economic index advanced. The Canadian dollar recovered some of yesterday's sharp declines. Strong gains in the CRB index also supported the commodity currencies. The Swiss franc rose against the dollar and the EUR/CHF is back in the 1.51 area where the Swiss National Bank earlier intervened to weaken the franc.
- The GBP/USD surged on comments by Bank of England Governor Mervyn King that it would be wise to take into account the prospect of higher interest rates. BOE policy makers voted unanimously to keep their assetpurchase program unchanged and maintain the key interest rate at a record low of 0.50%, minutes of the October 7-8 BOE Monetary Policy Committee meeting released today showed. That no BOE MPC policy member argued for increasing the bond purchasing program, as was the case at the last meeting, supported the pound. After finding support at the 1.58 handle, the GBP/USD has risen for six out of 7 days. Our short position stopped out today, but we are having a new short position with stop at 1.6750. The GBP/USD has support in the 1.60 area and resistance in the 1.67.
Financial and Economic News and Comments
US & Canada
- There are no signs of a double dip or W recession. The Globicus/qEcon Research US overall leading economic index reached 11.3 in September, its highest level since the 1981-82 recession, indicating the ongoing US economic expansion is intact for the next 6-9 months. The coincident index has turned around; nevertheless, remaining at a fragile -6.3 in August, primarily due to weak labor market conditions. US GDP growth, not directly measuring the labor market, should be in a 4% range in Q3 2009. This would be in line with an average growth rate of 3.8% following the previous three recessions. GDP growth was 3.5% following the 2001 recession, 2.7% after the 1990-91 recession and 5.1% following the 1981-82 recession.
- The Federal Reserve said its 12 district banks saw stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Residential real estate and manufacturing were reported to be positive sectors while commercial real estate was one of the weakest sectors, the Fed said in the Fed Beige Book. Districts generally reported little or no increase to either price or wage pressures, but references to downward pressures were occasionally noted, according to the Fed Beige Book. Consumer spending remained weak in most Districts since the last report, although some improvements were noted, the Fed said, adding that many Districts continued to report weak or declining loan demand, and many noted further erosion of credit quality.
- Sterling's weakness is helping to boost export prospects, with the decline in UK manufacturing output having moderated considerably in the past three months, according to the latest Quarterly Industrial Trends Survey released by the Confederation of British Industry. Manufacturing output declined in the three months to October, with 34% of companies reporting it decreased, and 26% reporting it increased, delivering a balance of -8%; however, registering a slower pace of decline than July's -31%. The sector's prospects look brighter, with sentiment improving and modest growth expected in the three months ahead, the CBI reported.
- Bank of England policy makers voted 9-0 to maintain the benchmark interest rate at a record low of 0.50% and keep their asset-purchase program unchanged, according to minutes of the October 7-8 BOE Monetary Policy Committee meeting. Recent developments were not sufficiently compelling to justify revising the target level of asset purchases that had been agreed at the August meeting or to change the level of Bank Rate at this meeting, BOE MPC members said in the minutes, adding that the forecast round ahead of the November Inflation Report would provide an opportunity to assess more fully how the medium-term outlook for activity and inflation had evolved since August. The BOE said the bond-purchasing program's effect on asset prices has been substantial and developments in data, equities, bank funding, corporate credit generally positive, the minutes showed.
- The pace of the Australian economic recovery has improved remarkably. The annualized growth rate of the Westpac-Melbourne Institute leading economic index rose to 1.7% in August from -1.0% in July, supporting Westpac's forecast that GDP growth in Australia will increase from 1.5% in 2009 to 4% in 2010, Westpac Banking Corp. and the Melbourne Institute reported. Current economic activity improved in August, with the annualized growth rate of the coincident index increasing to -0.1% from July's -0.2%.
FX Strategy Update