** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE
US DOLLAR: WILL CURRENCIES RALLY ON OBAMA'S INAUGURATION DAY?
Flight to safety continues to drive the US dollar higher against all of the major currencies outside of the Japanese Yen. US markets were closed today in observation of Martin Luther King, Jr. Day but that has not limited the volatility in the currency market. Europe dominates the headlines with big developments in the UK and Spain. Most Americans will be distracted by the Presidential Inauguration tomorrow, which leads us to comment on the possibility of an Obama Bounce on Tuesday.
On January 20th, the United States of America will swear in a new President. Unlike many other Presidents in the past, the Obama phenomenon spans the globe. This international support has spurred speculation that we may see an Obama Bounce in US equities and currencies on Tuesday. However based upon the past price action of the Dow Jones Industrial Average on Inauguration Day (Jan 20), investors should think twice about an Obama Bounce.
Taking a look at 50 years worth of data that spans 10 Presidents, Inauguration Day results in more down days than up. The Dow fell on January 20th 12 out of the past 16 Inaugurations. Although the trend was much more significant in the 60s and 70s, it has remained been relevant since then. The pattern also does not hold any bias to the party of the new President as exactly half of the positive days occurred during either party's new administration.
However it can be argued that the global adoration of Obama is unique. Many people call Barack Obama the John Kennedy of our times and it should be worth noting that stocks rallied on the day that Kennedy took office. History does not support arguments for an Obama Bounce but one is still a possibility. Since currencies are taking their cue from equities, if investors express their optimism towards Obama by buying stocks, we could see a bounce in currencies as well.
EUR/USD: DOWNGRADE OF SPAIN DRAGS EURO LOWER
With the US markets closed for Martin Luther King's Day, the odds were skewed towards a quiet trading. However, big news in Europe has made it anything but quiet. After hitting an intraday high above 1.33, the EUR/USD has sold off aggressively on news that Standard and Poor's downgraded the sovereign debt rating of Spain from AAA to AA+. The outlook is stable which means that further downgrades for the country is unlikely. However this could be the beginning of more downgrades in the Eurozone. Last week, Greece's sovereign debt rating was downgraded as well to A- while Ireland and Portugal have been placed on credit watch negative. The reasons for the downgrades are obvious. The Eurozone is in recession and many countries have suffered greatly. Public finances have deteriorated materially since the governments are trying to spur growth by spending. Given this dismal outlook, there is little chance that analysts have grown less pessimistic about the outlook for the Eurozone economy. Therefore we expect a further decline in the German ZEW survey. With the EUR/USD trading below 1.32, the next support for the currency pair may not be until 1.30.
GBP/USD: SECOND BANK BAILOUT RECEIVES CRITICISM
The British pound fell as low as 1.4450 on an intraday basis after the UK Treasury announced another bailout for the banking sector. They have set up a program that would allow the Bank of England to buy up to GBP50 billion in private sector assets, guarantee the toxic debt of banks, extend Northern Rock's payment deadlines and increase the government's stake in the Royal Bank of Scotland from 58 to 70 percent. This step is aimed at injecting more money into the economy and can be argued as a move towards quantitative easing. Even though more stimulus should be positive for the UK, we have not seen this reflected in the currency. Instead, the British pound has sold off aggressively on concern that the bailout plan was motivated by a deeper downturn in the UK economy and the fear that the government's efforts will not pay off. However Prime Minister Gordon Brown has received a lot of criticism over how much the bailouts would ultimately cost, who would shoulder the burden and whether it will work. We still believe that in the long run, all of the stimulus that the UK government has injected will help make the country be one of the first to recover when the global economy stabilizes. Consumer prices are due for release tomorrow and given the rise in shop prices and the smaller than expected drop in producer prices, CPI may beat the market's low forecasts.
USD/CAD: 50BP RATE CUT EXPECTED
The Canadian dollar has sold off aggressively ahead of the Bank of Canada's interest rate decision. With oil prices falling and the US economy continuing to slow, the BoC is expected to cut interest rates by another 50bp on Tuesday to 1 percent. Since the middle of 2007, the central bank has taken interest rates from 4.5 percent to 1.50 percent, the lowest level in 50 years. Tomorrow's rate cut will make the Canadian dollar the fourth lowest yielding G10 currency. The reason why the Bank of Canada needs to continue to aggressively stimulate the economy is because we are seeing a major slowdown in both the East and West. In the month of December, the unemployment rate rose to the highest level in close to 2 years. The IVEY PMI index of manufacturing activity hit a record low while Canada's trade surplus fell to the lowest level in more than 10 years. This morning's international transactions data indicated that foreigners were net sellers of Canadian dollar denominated investments for the fourth time in five months. According to Statistics Canada, the Canadian economy slipped into recession in the beginning of the fourth quarter. The Canadian government is very concerned that the recession will deepen in the coming months and they are probably right since oil prices have fallen 35 percent since December. Consumer spending within the country is just starting to contract as Retail Sales in October fell by the biggest amount in 2 years. The big question is will the Bank of Canada take interest rates as low as the US? Since the US, Japan and Switzerland already have interest rates near zero, if Canada chose to join the club, it would not be out of ordinary. The economy is weakening so much that the Bank of Canada has its back against the wall and therefore we could realistically see 0.5 percent interest rates or lower in 2009.
YEN RISES DESPITE WEAK ECONOMIC DATA
Japanese Yen crosses were weaker across the board today as the ratings downgrade of Spain set a wave of risk aversion through the financial markets. The biggest losers were GBP/JPY and EUR/JPY on a percentage basis as Eurozone and UK news stole the headlines. The Japanese Yen continued to gain strength despite weak economic data. Industrial production saw its steepest decline in more than 55 years as slower global demand cripples the Japanese economy. Domestically, Japanese consumers are not spending either as department store sales drop by the largest amount in 10 years. This trend will probably continue, which will weigh heavily on Japanese corporations and unfortunately the strength of the Yen is not helping either. Consumer confidence is due for release this evening. If consumers were more confident about the economy, they would have probably not cut their spending by as much as they did in December.
USD/CAD: Currency in Play for Next 24 Hours
USD/CAD is the currency pair in play for the next 24 hours with manufacturing shipments due for release at 8:30am ET or 13:30 GMT and the Bank of Canada rate decision at 9:00am ET or 14:00 GMT.
USD/CAD is trading within the Buy Zone, which we determine using Bollinger Bands. The uptrend remains intact as long as the currency pair holds above 1.2235, which is the 50% Fibonacci retracement of the 1.3019 to 1.1465 sell off and the 50-day SMA. If the Bank of Canada is as dovish as the market expects and signals more rate cuts to come, USD/CAD could rally to its 30 day high of 1.2674. Above that, it could challenge the triple top at 1.30.