US Dollar, Japanese Yen Gain As G7 Predicts 'Severe' Global Recession

The US Dollar and the Japanese Yen rose overnight as the G7 said the 'severe' global recession will persist for most of 2009 while Japan's economy shrank the most since 1974 in the fourth quarter, sparking risk aversion and weighing on stock prices. More of the same is likely ahead in European hours with index futures down over 1% ahead of the opening bell.

Key Overnight Developments

  • G7 Nations Say 'Severe' Global Slump Will Persist for Most of 2009
  • Japanese Economy Shrinks 12.7% in Q4, Worst Recession in 30 Years
  • New Zealand Producer Prices Fall, Supporting RBNZ Rate Cuts
  • UK House Prices Fall to Record Low in February, Says Rightmove

Critical Levels

The Euro and the British Pound both slipped against the US Dollar as risk-averse investors flocked to the safe haven of the greenback in overnight trading. Stocks fell -0.5% in Asia and European index futures slipped over 1% ahead of the opening bell.

Asia Session Highlights

The Group of Seven (G7) industrialized countries (which includes the U.S., Japan, Germany, U.K., Italy, Canada and France) issued a communiqué following a summit in Rome over the weekend saying a 'severe' global slowdown is expected to persist for most of 2009. Although the G7 warned of 'excess volatility' and 'disorderly movements' in exchange rates, they fell short of explicitly mentioning specific currencies. Policymakers said the full effects of individual nations' fiscal and monetary efforts will 'build over time' and again reaffirmed a 'commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector.' Notably, the G7 also said that it 'remains committed to avoiding protectionist measures, which risks exacerbating the downturn.'

Japan's Gross Domestic Product shrank an annual rate of -12.7% in the fourth quarter, confirming the world's second-largest economy is mired in the worst recession since the 1974 oil crisis. The Bank of Japan foreshadowed a particularly sharp decline, with BOJ head researcher Kazuo Momma saying that the contraction in the three months through December 'may have been unimaginable' and warning that the decline in the first quarter of this year may be even greater. Dwindling export demand have pushed Japanese companies to cut back production capacity and boosted unemployment, weighing on consumer spending and depressing economic growth. Indeed, Industrial Production fell -20.8% in the year to December, the worst reading on record. The outlook remains bleak for the foreseeable future: The International Monetary Fund said global economic growth will come to a 'virtual standstill' in 2009 to add just 0.5%, the lowest yet in the postwar period. Such a scenario is set to substantially prolong the economic downturn for heavily export-oriented countries. Looking at the Japanese Yen, continued pain in the stock market looks set to push the currency higher in the near term. However, it does stand to reason that at some point the deleveraging we have seen in recent months will find a floor and the fundamentals will take over to erode the correlation between the Yen and risk appetite. As this occurs, the dire state of the Japanese economy is likely to send the currency considerably lower.

New Zealand Producer Prices printed considerably worse than expected with wholesale inflation tumbling -2.2% in the fourth quarter, the first negative reading in over two decades. Utility costs led declines: electricity, gas and water prices fell a whopping -27.4%. Falling producer prices point to downward pressure on consumer inflation as firms pass on lower manufacturing costs via cheaper finished items. This will give the Reserve Bank of New Zealand scope for continued interest rate cuts, with overnight index swaps showing traders are currently pricing in 50-75 basis points in easing when policymakers convene in March.

In the UK, Rightmove House Prices slipped -9.1% in the year to February, a new record low. Persistent declines in home values have produced a deep negative wealth effect, adding to downward pressure on spending and thereby overall economic growth. Real GDP is forecast to shrink -2.4% through 2009, the worst in the postwar period and the first time the economy shrinks by more than 2% since 1980.