Monday April 27, 2009

The elevation of the outbreak of swine fever to an official state of emergency in the United States has caused ramifications in the currency market. Given the apparent source appears to be Mexico, its peso is the big loser dropping by almost 3%, while the unknown impact on trade and tourism has sent dealers scurrying out of other high yielding currencies or riskier assets in search of the safe haven of the yen. The impact on the dollar is less noteworthy this morning and is further convoluted by one media report accusing France's third largest lender, Societe Generale of sitting on a large market related loss. The impact coupled with the upgrade to risk aversion today has sent the euro lower to $1.3115 against the dollar while $/¥ is trading at 96.68. Against the euro the yen is stronger at ¥126.84.

Tourism in 2008 was Mexico's third-largest revenue earner at $13.3 billion. That sits behind oil revenues and income sent home by business interests from wealthy Mexicans from outside the nation. The order to close movie theaters, bars and restaurants across Mexico City is a serious effort to nip the problem in the bud, although the challenge now is that the disease has claimed 100 lives and outbreaks have been reported in several U.S. states and Canada.

While the obvious health risks are apparent, the impact on the economy is unsure. After 9/11 the anthrax scare was responsible for helping keep consumers at home for fear of coming into contact the deadly spores. Just a couple of years later the impact of SARS in the Far East created havoc with local economies and the culling of poultry in some centers. For now swine fever is on the radar but for how long we don't know. The decline in prices of European airline stocks in response to lower air-traffic is an expected knee-jerk response, but faced with uncertainty, one cannot blame sellers.

In other weekend news, Larry Summers, chairman of the White House National Economic Council reminded the media that despite the revival of fortunes in the equity market, declines in the number of employed workers is likely to remain a key feature of the remaining months of 2009. Later this week, data is expected to show that the worst days of the recession were confined to the final quarter of 2008 while GDP is expected to have contracted at a lesser pace to start this year. Investors are expecting a 4.7% annualized economic contraction on Wednesday, which will compare to a 6.3% contraction in the fourth quarter. The rise in unemployment as a result of businesses running down inventory is expected to slow the pace of decline going forward as companies slim down.

Reports of one bank ‘failing' the so-called stress test ahead of next Monday's official release of the results may calm equity investors' nerves this week. The unnamed bank will now have to consider how to mend the holes in its defense-mechanism and figure out how to bolster its capital provision through either private of government hands.

As the U.S. gears up for the official release, the Europeans will be keenly awaiting next week's announcement form the European Central Bank. As well as having to decide whether monetary policy needs to or should be cut further from its present setting of 1.25%, the central bank is widely expected to make a decision on the need for other measures known as quantitative easing in order to eradicate the recession through stimulating lending. In this manner, the bank could print money and directly purchase government or corporate bonds in the open market in order to depress yields and stimulate the entire lending process. The hitherto reluctance to do so has been seen as exacerbating the likelihood of Europe remaining mired in recession while the U.S. emerges from it and leads the global economy out.

The swine fever story has kept the Pacific nations edgy today. The Aussie dollar is weaker against the dollar, buying 71.37 U.S. cents to start the week. The British pound is also weaker despite a strong close to the previous week and today has slipped back to $1.4590.