The following is the currency outlook released today by the Brown Brothers Harriman Currency Strategy team:
Swine flu and concerns about US banks may be hitting the headlines but, the European banking sector remains a threat for the euro zone. Indeed, ECB President Trichet, speaking in NY yesterday, highlighted the fact that the European banking sector is significantly important in the euro area compared to the US although Trichet noted signs that liquidity was moving away from the ECB balance sheet to the money markets was an indication of improving confidence. The President held back from making any strong hints about policy, merely stating that any non-standard measures would be announced at the next meeting May 7. He attempted to address the criticism that the ECB’s refi rate is higher than the Fed rate by pointing out the importance of the 0.25% deposit rate in Europe, and the rough parity of euro and dollar money market rates. The President also defended the ECB’s stance on policy indicating the ECB had been the first to introduce non-traditional policy measures. The ECB’s balance sheet did expand in late 2008 although overall assets have slipped by more than 10% since their January highs. While the Fed’s balance sheet also slipped as some programs such as the commercial paper program began to take affect, the Federal Reserve have continued to adopt additional policy measures including the purchase of US Treasuries and expanded its MBS program to address other financial concerns. The ECB President and some ECB members including Weber and Hurley appear to be continuing with a cautious approach to policy. That’s in contrast to other ECB members such as Austrian Council member Ewald Nowotny whose dovish comments yesterday coincided with the euro’s tumble by over a big figure to around $1.30 yesterday. Nowotny said the central bank ‘stands ready to use unconventional measures of quantitative easing to assure European firms and consumers access to credit at appropriate conditions.’
The Japanese yen is the top performer against the major currencies today; the US dollar has now given up 38.2% of this year’s gains against the yen (JPY95.98) while the euro cross has now lost half its gains (124.76). That isn’t a reflection of the Japanese economy. While there have been some signs that the decline in exports may be easing, today’s retail sales point to ongoing weakness in the consumer sector. Retail sales fell for a seventh month in March. Sales were down 3.9% from a year ago compared with February’s 5.7% slump. Though better than the 4.7% drop expected, this is still a sharp decline, and just one month’s data. Meanwhile, the April business confidence index showed a slightly better monthly outcome, up to 30.8 from 30.4, though not as much as expected. Note that the BoJ is holding its regular meeting on Thursday: rates will most likely stay on hold (at 0.1%) and the central bank already on a program of quantitative easing.
The Mexican peso has lost further ground overnight amidst concern about the escalation of the swine flu scare. The World Health Organization said the flu outbreak is no longer containable, upgrading its global pandemic alert level to four from three. The current outbreak of flu in Mexico is a cause for concern for both the people of Mexico and the economy, but is also raising concerns about the possible effects on economies worldwide. Level five signals a pandemic is imminent while level six signals it is under way. However, it remains too early to make any material changes to our Mexico forecasts just yet, but the situation bears close watching. There was further news that could increase risk concerns for investors with the Wall Street Journal reporting that US regulators have told Bank of America and Citigroup that they need to raise more capital based on the stress tests. The two banks are expected to respond, denying the assessment, according to the report.