New Overnight Developments Abroad: Emerging Market and Commodity-Sensitive Currencies Weaker

November 19, 2008

The dollar has gained 0.8% against the Australian dollar, 0.6% versus the kiwi and 0.4% against the Canadian dollar. The U.S. currency also advanced significantly against several emerging market currencies like the South Korean won , Indonesian rupiah, and Philippine peso. Risk aversion is high amid concern about global economic prospects and uncertainty about whether a bailout of U.S. automakers will be approved in Congress.

Sterling fell 0.6% against the dollar as Bank of England minutes reveal that a greater-than-150 bp rate cut had been seriously considered. The Monetary Policy Committee expects a very sharp drop in inflation and sharply deteriorating growth. The vote was unanimous on Nov 6th for the 150 basis point cut, and the minutes indicate a readiness to cut significantly further soon. Although some worry was expressed about a possible excessive drop in the pound, at least 50 basis points in December seems likely.

The dollar otherwise is off 0.1% against the yen, unchanged versus the euro, and up 0.3% against the Swiss franc.

Governor Stevens of the Reserve Bank of Australia called the international economic situation serious and said Australian growth will slow despite monetary and fiscal stimulus and a weaker exchange rate. The RBA will likely cut the 5.25% cash rate by at least another 50 bps in December and maybe more as no policy meeting is scheduled for January. Australian motor vehicle sales fell 0.5% in October and 10.6% from a year earlier.

Asian and European equities are lower. Share prices fell 0.7% in Japan and Australia, 2.7% in Thailand, 1.9% in the Philippines, 1.6% in Singapore, 1.8% in India, 1.9% in South Korea, and 0.8% in both Hong Kong and Indonesia. Chinese equities bucked the trend and rose 6.2%. In Europe, the Ftse is 1.2% lower in reaction to very dovish Bank of England minutes. The Paris Cac is off 0.8%, and the Dax is 0.5% lower.

Sovereign bond yields are sharply lower in Asia, Europe and North America. The 10-year JGB yield slid 1.5 basis points to 1.465%.

Oil eased 0.6% to $54.04/barrel despite unseasonably cold weather in the U.S. Northeast. Gold firmed 0.5% to $736.50 per ounce.

Japan’s all industry index slid 0.1% in September and by 0.7% from September 2007. A new index for domestic demand sank 0.9% in September following a 1.1% drop in August. The all-industry index declined 3.3% at a seasonally adjusted annualized rate in the third quarter. Japanese banks continued a scramble to raise fresh capital.

Producer price inflation accelerated in New Zealand during 3Q08. Input prices jumped 3.7% from 2Q and 13.6% from 3Q07, while output prices went up 2.8% on the quarter and 9.8% on the year. These gains exceeded expectations but reflect a time before commodity prices tanked and world growth darkened.

Nigerian CPI inflation also accelerated, climbing to 14.7% on-year in October from 13.0% y/y in September.

In Britain, the CBI industrial trends survey for November was released and revealed an unexpected one-point improvement to a still-depressed reading of -38 for orders. Output expectations dropped another 11 points to -42, lowest since September 1980.

Spain confirmed a 0.2% drop in real GDP last quarter, as a 6.4% plunge in construction investment and a tiny 0.1% uptick in consumer spending outweighed a 5.9% increase in government expenditures and better-than-expected support from net exports.

ECB President Trichet hinted at more rate cuts as he called the world’s financial situation the worst since WW2.

A who’s who will be speaking at a Cato Institute Conference today on “Lessons from the Subprime Crisis.” The list includes Kohn, Poole, and Lacker from the Fed, Issing formerly of the ECB and Bundesbank, John Makin, Anna Schwartz, and Alan Meltzer. Market-moving remarks are likely to surface.

At 13:30 GMT, the United States releases data on consumer price, housing starts, and building permits. FOMC minutes arrive at 19:00 GMT.


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