Morning Run … August 11, 2009

Key News

 

* Ruble Falls in Longest Slump Since February on Record GDP Drop

 (Bloomberg)

* Brazil’s Real Drops to Lowest in August as China’s Loans Fall

 (Bloomberg)

* BOJ’s Shirakawa Says Japan Recovery Likely to Be Weak

 (Bloomberg)

* U.K. Trade Gap Unexpectedly Widens as Global Recession Persists

 (Bloomberg)

 

The Event Agenda

 

 

 

The Morning Run-Down

The dollar continues to move higher today, except against the yen.  Yesterday it was the European currencies that took the brunt of the selling.  Today it’s the commodity currencies (Australian dollar, Canadian dollar, New Zealand dollar).  And the yen is being dragged higher on selling of the commodity currency/yen cross rates.  With stocks are down more than 1%, crude down more than 2% and treasuries higher, risk is being taken off of the table. 

 

The data overnight in China is a drag on the global recovery story.  Consumer prices in China continued to decline, industrial production was shy of expectations and exports in China ticked back down, to -23% year over year.  Exports have fallen for nine straight months.  But perhaps most interesting, new loans in China dropped from 1.5 trillion yuan in June to just 355 billion yuan in July—the lowest level since October of 2008.

 

 

 

This puts pressure on the economies that have benefited from the liquidity-driven demand from China.  The commodity currencies and emerging market currencies are lower as a result.   

 

The risk barometer is being dialed up.  In Russia, the value of the ruble is under pressure again.  Earlier this year, the central bank spent over $200 billion of its foreign exchange reserves to defend the value of the ruble after its economy came under pressure from the global financial crisis and recession.  Investors fled Russia, global demand for its oil collapsed, and speculators sold the ruble. 

 

The economy is now contracting at 10.9% annualized rate last quarter, the worst on record.  And the ruble is in its longest decline since February, when the central bank was defending against a collapse of the currency.

 

Also, the Latvian economy was downgraded today by Standard and Poors after reporting a 19.6% annual rate of contraction in GDP.   S&P expects government debt to swell to 80% of GDP by 2011 (from 19% last year).

 

The Bank of Japan kept rates at 0.10% and did not announce any new alternative monetary policy initiatives (i.e. quantitative easing).  These comments from BOJ Governor Shirakawa…

 

*BOJ can’t expect clear, strong recovery

*BOJ doesn’t see risk of deflation spiral now

*Can’t be confident about final demand

*Japan economic outlook depends on final demand

*Prices are declining worldwide

*Global economy pointing upward

*Downside risk remain high for Japan economy

 

The Fed rate-setting meeting concludes tomorrow afternoon.  The Fed will not change rates, but there will be considerable attention to the language on plans for its asset purchase program (i.e. quantitative easing).  Considering the Bank of England has just announced an increase in its quantitative easing program, a cautious stance by the Fed is likely. 

 

The dollar benefited on the relative growth/prospective relative yield trade on Friday, a distinct shift away from the “risk sensitive” inter-market correlations we’ve seen since the middle of 2008.  And today the markets are back in the risk taking vs. risk aversion mold.  As a result, the dollar is benefiting on risk aversion/threats to global economic recovery.