09.30 AM GMT Overall strategy: Severe short-term economic weaknesses will continue throughout all the G7 countries. In this environment, no currency will find it easy to gain support and there will be additional pressure on all countries to maintain a competitive currency to support exports. In the near term, the dollar can still gain significant support on defensive grounds, although the longer-term outlook still appears much less favourable.

Key events for the forthcoming week:


Time (GMT)

Data release/event

Monday March 2nd


US ISM index (manufacturing)

Thursday March 5th


Bank of England interest rate decision

Thursday March 5th


ECB interest rate decision

Friday March 6th


US employment report


The economic data has remained very weak with particular fears that further labour-markets deterioration will trigger further downward pressure on consumer spending. There will be further uncertainty over the banking sector, although there will also be some hopes that the fiscal stimulus will provide some underlying support. The international economy will remain an important focus and the dollar will continue to gain some degree of defensive support, especially with all major economic areas in serious difficulties. Fears over the long-term deficit financing position will limit the scope for support.


Confidence in both the Euro and dollar was generally fragile over the week which again made it difficult to secure a decisive direction. The US currency had a firmer tone on defensive demand and strengthened to around 1.2650 on Friday.

The banking sector remained an important focus with the Administration announcing further support for Citigroup, although speculation over a move to opt for full public ownership continued as financial stocks generally remained under pressure.

The US data continued to offer very little relief with a series of very negative releases over the week. The consumer confidence data particularly striking as there was a further sharp decline to a record low of 25 in February from a revised 37.4. The Case-Shiller index house-price index fell 18.5% in the year to November, although a separate survey reported 0.1% rise in December prices.

Initial jobless claims increased again in the latest week to 667,000 from a revised 631,000 the previous week and this was the highest figure since 1982 while continuing claims pushed to a record high above the 5 million level, illustrating the risk that higher unemployment will continue to undermine consumer confidence.

Durable goods orders fell 5.2% for January while there was a 2.5% core decline over the month, the sixth successive decline. The US housing data remained depressed with existing home sales falling 5.6% in January to an annual rate of 4.49mn, the lowest rate since 1997, and prices declined to the lowest levels since 2003. New home sales declined to an annual rate of 309,000 from a revised 344,000 previously.

In testimony to the Senate Banking Committee, Fed Chairman Bernanke warned that the recession could be extended into 2010 if there was no stabilisation in the financial sector. He also warned over the risk of a vicious circle developing as a weakening of demand led to further stresses within the financial sector.


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The Euro-zone economy industrial sector will continue to weaken in the short term. There is a strong probability that the ECB will cut interest rates in March, probably by a further 0.50%. The Euro will also continue to be unsettled by fears over the Eastern European economy and the impact on European banks. The Euro should still gain some degree of support from expectations that the central bank will resist quantitative easing and will act to protect the currency.

Although it did advance against the weak yen, the Euro was unable to make significant headway against most majors currencies over the week as structural fears remained an important negative influence.

Standard & Poor’s downgrading of Ukraine’s debt rating further increased doubts over the outlook for Eastern European economies as a whole and also increased fears that there would be further destabilising losses within the European banking sector. These fears continued to unsettle the Euro despite expectations of financial support.

The German IFO index edged slightly lower to 82.6 in February from 83.0 previously. Although this was a record low, the overall impact was limited with hopes that conditions were starting to stabilise at depressed levels. German unemployment rose by a further 40,000 in January reinforcing the recent deterioration. There was a further decline in Euro-zone business confidence while industrial orders data remained extremely weak with a 5.2% fall for December to give a 22.3% annual decline.

ECB Chairman Trichet who stated that the Euro-zone financial system was under severe strain which reinforced market fears. Comments from ECB officials also continue to suggest strongly that interest rates will be cut by at least 0.25% next week.


The Japanese economy will remain in severe difficulties in the short term with severe downward pressure on the industrial sector which will have a negative impact on wider demand. There will be strong pressure for further supportive measures from the Bank of Japan including a move back to quantitative easing. Overall sentiment towards the yen has clearly deteriorated which will tend to undermine the currency, although caution will still be required given the possibility of capital repatriation and a rapid reversal in moves.

The yen was subjected to heavy selling pressure as confidence in the Japanese economy deteriorated sharply. The currency weakened to three-month lows beyond 98.50 against the dollar and 125.50 against the Euro before a limited correction.

The economic data remained extremely weak with industrial production falling by a further 10.0% in January after a 9.8% drop the previous month while core consumer prices were unchanged over the year and household spending fell.

The trade account was in heavy deficit for January with exports falling by over 45% in the year to the lowest nominal level for 10 years. Although the January data is weak on seasonal grounds, the data triggered further alarm and reinforced economic fears.

The bankruptcy of credit supplier SFCG increased fears that there will be further major difficulties in the financial sector which would put further downward pressure on credit supply and also continue to undermine the economy.

The latest capital account data recorded an increase in net investment outflows which will reinforce negative yen sentiment. There was additional pressure for the Bank of Japan to buy equities directly to support the stock market, especially with the main equity indices trapped near 26-year lows.


The economy is set to weaken further in the short term with markets looking closely at the Bank of England response. A decision to cut interest rates further, allied with a move to directly expand the money supply, would be a negative underlying factor for Sterling. The UK currency moves will also be influenced strongly by trends within the banking sector and a sustained improvement in sentiment would provide support. Sterling will also gain some protection from severe difficulties in all major economies, but any gains are liable to be limited.

Sterling struggled to a secure a decisive direction over the week, with selling pressure on rallies above 1.46 against the dollar and beyond 0.88 against the Euro while wider dollar gains pushed it back towards 1.42 late in the week.

The BBA mortgage loan data recorded a small increase for January to 23,400 from 22,400 in December, although there was still an annual decline of over 40%. The latest CBI retail survey registered a figure of -25 for February from -47 the previous month which suggested that the rate of sales decline was slowing.

UK GDP was unrevised at -1.5% for the fourth quarter of 2009 compared with expectations of a downward revision to 1.6% with an annual decline of 1.9%. The index of services recorded a 0.9% decline in the three months to January which was also slightly stronger than expected. The Nationwide reported a further 1.8% decline in house prices for February for an 18% annual decline.

Comments from Bank of England officials were generally downbeat with Blanchflower warning over the risk of a protracted recession while Barker was also generally pessimistic over the near-term outlook.

The Royal Bank of Scotland posted losses of over GBP25bn for the latest year, illustrating the severe difficulties in the sector. Confidence was supported to some extent by a new asset protection policy for the bank through a government-supported insurance scheme. In addition, the government announced a reversal of policy surrounding state-owned Northern Rock with the bank now aiming to expand lending this year and there were hopes that the banking sector would start to stabilise.

Swiss franc:

Confidence in the Swiss economy will remain generally weak in the short term, especially with fears over the export sector. The franc will continue to gain some defensive support at times, especially when risk appetite deteriorates. The Eastern European stresses will have a mixed impact as defensive support for the franc will be offset by fears over the Swiss banks. Given the threat of National Bank intervention, the franc will find it difficult to sustain significant gains.

The Swiss currency was slightly weaker against the dollar with lows beyond 1.1750 as it was unable to sustain the rapid gains seen late last week. The franc proved resilient against the Euro while unable to sustain gains beyond 1.48.

The domestic and international banking sector remained an important influence on the currency. The franc gained some support when fears over the global banking sector increased. This was offset by fears over capital outflows after the court ruling against UBS which could force changes to banking regulation within the Swiss banks.

The UBS consumption index weakened to 0.99 for January from 1.18 the previous month which suggested that consumer spending levels remain under pressure.


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Australian dollar:

The Australian dollar found support on retreats to below the 0.64 level against the US dollar, but struggled to make headway as confidence in the global economy remained weak Gold prices also retreated after strong gains last week which stifled buying support for the currency as sentiment remained very fragile.

The domestic investment was stronger than expected with a 6.0% increase for the fourth quarter while private-sector credit data was also stronger. The data dampened expectations over a further sharp interest rate cuts at the March meeting.

There is scope for sharp currency swings as sentiment fluctuates, but there is still scope for a limited Australian dollar advance, especially with the yen under pressure.

Canadian dollar:

The Canadian dollar fluctuated around the 1.25 level against the US currency over the week in choppy range-led trading conditions. The domestic economic data remained weak with a very sharp 5.4% decline in retail sales for December.

Currency trends were still influenced strongly by trends in risk appetite with caution over global economic trends a negative influence on the Canadian dollar.

Overall, there is scope for limited Canadian currency gains on hopes that the global economy will soon hit a trough with the domestic downturn limiting support.

Indian rupee:

The rupee was subjected to increased selling pressure over the week, although the triggers for the selling were slightly different from recent weeks as the local stock markets was generally resilient. The rupee dipped to a record low near 51.0 before finding some support on dollar selling by state banks.

Standard & Poor’s decision to put India’s credit rating on negative watch from stable previously was an important negative factor with fears that capital inflows would be undermined. The currency was also undermined in part by a firmer US dollar trend while there was also month-end dollar demand late in the week.

The rupee will remain vulnerable to some further downward pressure on structural fears in the short term, although losses should be contained from current levels.

Hong Kong dollar:

The Hong Kong dollar drifted marginally weaker over the week and dipped to around 7.7540 against the US dollar on Friday, although ranges were generally narrow.

Currency moves were dominated again by trends in the local stock market and degrees of risk appetite. Confidence remained fragile and renewed stresses in Asian markets pushed the currency slightly weaker on Friday.

The Hong Kong dollar should be able to maintain a relatively steady tone with fluctuations still dominated by the degree of risk appetite in global markets.

Chinese yuan:

The Chinese currency was confined to narrow ranges with marginal losses to just beyond 6.84 against the US dollar over the week as tight control continued.

The yuan was unsettled to some extent by weakness in the Japanese yen with wider fears over the Asian currencies also a feature. There was caution ahead of the new parliamentary session which is due in the first week of March.

There was further uncertainty over the Chinese economy with a source suggesting that new lending had been CNY800bn for February, although there was also some evidence that production was weakening again which lessened support.

Yen weakness will continue to have some negative yuan impact. The currency will still gain some support from hopes over a Chinese economic recovery, although confidence could reverse very quickly given serious global economic stresses.