Currencies Get a Bounce as USD Corrects

Global Economy Continues to Weaken

The Australian dollar is finally getting a break having rebounded from earlier lows near .6250. The Aussie dollar has fallen 14% in the past month as bad news for the export driven economy continues to pile up. Earlier today, the Australian government reported that exports fell 3.1% in December reducing the Aussie trade surplus to $589 million. The Australian trade surplus peaked at $2.582 billion in October and has fallen dramatically as global trade volumes have contracted 45%.

Just after the trade figures, the Australian government announced an additional $42 billion economic stimulus package and the RBA cut its overnight cash rate to a record low 3.25%. The Aussie dollar has staged a nice 110 basis point rally off the overnight low and with the currency trading close to 6-year lows you have to wonder if the worst is over for the Aussie dollar. We certainly don't see the Aussie returning to the 90-cent plus level any time soon, but at current levels you have to think there is more upside potential than further downside risk.

Bad economic news continues to build in Europe. Spain reported that another 200,000 jobs were lost in January bringing that countries unemployment rate to 13.9%, the highest in Europe. Germany reported that retail sales fell 0.7% in December, a startling figure as December is usually the best month of the year for retailers. Economists are now calculating that the German economy probably contracted between 1.5 to 2.0% in the fourth quarter marking the economy's worst showing since reunification in 1990. Finally, European producer prices fell 1.3% in December suggesting that inflationary pressures are non-existent. With European CPI now as low as 1.1%, the low PPI figure adds to expectations that the ECB will cut interest rates another 50 basis points in March. The euro sold off earlier on the weak economic data but it has since staged a nice rally of more than a cent against the dollar.

US Yield Curve Steepening

Stock markets have been fairly quiet around the world today. Share prices were marginally lower in Asia and Europe overnight as energy producers weighed on the markets. Oil fell to just below $40 earlier today, a two-week low. North American markets have opened flat with the focus on earnings and the Obama stimulus package as it makes its way through the Senate. Gold has found a footing and has rebounded $15 after trading below $900 earlier today. Bond prices are under pressure again today as US yields continue to move higher. The 10-year Treasury bond is now yielding 2.77%, up from a low of 2.06% at the end of December. 30-year Treasuries are at 3.54% today, well above the 2.52% low established on December 18th. The US yield curve continues to steepen, suggesting that the bond market sees an economic recovery, or at least future price pressures, in the not too distant future.

The Canadian dollar remains stuck in the 78 to 84-cent range it's been in since last October. The loonie has bounced off earlier lows just below 80 cents as the US dollar has traded lower against most currencies this morning. There is no Canada specific news this morning to provide the market any direction so CAD trading appears to be predominantly flow and big dollar driven. The next major item for the dollar will probably be Friday's employment reports which are not expected to be rosy for either the US or Canada. Until then, the Canadian dollar should continue to range trade in a fairly directionless market.