*** Currency Market Analysis 25-11-2011 ***

[The Machine]

The US dollar is gaining against most major currencies this morning after a less-than-eventful trading session yesterday, with the US out for Thanksgiving. Europe has little to be thankful for these days, as economic data from the continent deteriorates and the crisis of confidence in sovereign debt spreads to the core nations of Germany and France. The euro is hitting seven-week lows against the dollar as the cost of borrowing for European nations continues to rise, putting more strain on an already-fragile system. With most of the US still out shopping on Black Friday, liquidity should be thin and price action will be erratic as we trade into the weekend.

Euro Breaking Down

The euro continues to fall steadily as confidence in the region diminishes while the outlook for a solution to the crisis seems as far away as it has ever been. Italian bond yields have hit a euro-era high around 6.5%, compounding the debt issue and making it even more difficult for the nation to claw its way out of the hole that it is currently in. The tough austerity measures adopted by so many European nations, combined with skyrocketing interest payments on their debt, could mean that growth from the region will be subdued for some time as consumers put away their wallets and brace for tough times ahead. Italian Retail Sales figures were published overnight and the results were worse than expected, adding further to the pressure on the common currency, which has 1.30 clearly in its sights. One of the big issues in the region is the hope by some nations that the European Central Bank will become the lender of last resort and begin issuing euro-denominated bonds in an effort to ease monetary conditions. Germany is very much against this idea but it is looking more and more likely that the peripheral nations, and perhaps even Germany and France, will need some help from the ECB in the near future. Germany is being steadfast in their desire to keep the ECB independent, but a US-style quantitative easing programme from the central bank could be in store in the coming months. The ECB does still have some room to move on interest rates, so the prospects of another rate cut by new president Mario Draghi cannot be ruled out.

Moving to Asia, the big news there was a report saying that there is a good chance Japan will have their AAA credit rating cut by a local ratings agency. This news knocked the yen off its pedestal and moved it into the upper-77 region, giving investors more reason once again to buy US dollars. The past few months have seen some interesting developments as far as the traditional “safe haven” currencies are concerned: six months ago you couldn’t pay someone to buy USD, as the Swiss franc and the yen were much more in demand as the prospects for the US economy were quite bleak (and still are). Since then we have seen a massive intervention by the Swiss National Bank, who capped EURCHF at 1.20, which meant a mass exodus from the currency. Japan has a similar situation as well, as they are an export-dependent nation that is very sensitive to currency rates and wants the yen to be weaker than it currently is. The Bank of Japan has been known to intervene on several occasions and we have seen some activity in the past few months, although the efficacy of their interventions is questionable. The yen does remain stubbornly strong, but the dynamic at play here has meant that the USD has regained its status as the go-to currency in times of distress.

Loonie Hanging On

The Canadian dollar is on the defensive this morning, testing the highs in USDCAD that we saw around the 1.05 level a few days ago. There does seem to be good resistance above 1.05 for the pair, but the fundamental backdrop in Canada does not lend itself well to a significantly stronger Loonie. Oil prices remain fairly well-supported in the $90 region, and this is helping the CAD somewhat, but the overall picture of uncertainty does not bode well for those looking for a stronger Canadian dollar. The trend in USDCAD is still very much to the upside, and the general theme these days is for weaker results from the commodity-linked currencies. Speaking of which, the Aussie and the Kiwi dollars have been the worst hit by the recent flare up in uncertainty, as they are typically more sensitive to swings in sentiment. There is no more high-impact data coming out today, but next week we will be inundated with data from all corners of the globe, which should keep things interesting. A clearly defined hedging policy is one tool to combat the swings from uncertain markets.

Have a great weekend.

[design interrupted]

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[rvb4jan1]

Thank you!