It was Presidents day yesterday in the US, so trading throughout the day was thin, with most currencies trading within what can these day be considered tight ranges. The downbeat G7 meeting at the weekend had weighed on investor sentiment, and seemingly sent the Japanese representative to seek solace in the bottle. Stock markets were generally lower, and Lloyds' shares once again dropped, down by 20% with rumours that the whole bank may be nationalised, before a recovery to close only 8.1% down once the government denied the rumours. Sterling has stayed hovering around 1.12 against the Euro, and between 1.4150 and 1.43 against the Dollar.
It is perhaps no surprise that the Japanese representative decided to drown his sorrows, when the Japanese economy is suffering so badly. Japan has the second biggest economy in the world, but the rapidly appreciating Yen, up on a trade weighted basis by 30% since August last year, has caused a spectacular 14%qoq collapse in exports, the greatest fall on record, which has dragged 4Q 2008 GDP down a massive 3.3% from the previous quarter. This is a much greater fall than either the UK, or the Eurozone, which both reported 1.5% drops. With the Japanese economy suffering so much, there are signs that the Yen isn't gaining quite as much as it used to from risk aversion, although for now the Yen is staying strong still keeping the Pound down to around Y130.
Today we get the start of the big data releases for the UK with the inflation data announced. There are a couple of conflicting influences that make it hard to predict; the last remnants of the VAT decrease may still have some effect, and the falling Pound will have increased import prices. Still the CPI measure is expected to drop taking the annual rate down to around 2.6%, while RPI, which is based on a broader base of prices, crucially containing housing, is expected to fall to around 0.2%, although it could end up in negative territory. With the BoE already predicting inflation down below their target in a 2 year horizon, it is unlikely that such short term volatility will have any effect on interest rate expectations.
Later today Obama is expected to provide the Presidential seal to the stimulus package, bringing the huge amount of government spending, and larger amount of tax cuts, one step closer.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital