EUR/USD Falls on Eastern Europe Exposure

EUR/USD Falls on Eastern Europe Exposure

* The dollar rose against its rivals on Tuesday as international equities slumped on concern that banks may face further losses amid a deepening global recession. New York manufacturing dropped to a record low and US homebuilder confidence remained near a record low in February. The yen fell against the greenback but gained against other key currencies as safe haven flows benefited the dollar and yen. Sterling declined versus the dollar but rose against the euro as UK consumer-price inflation fell less than expected in January. Gold climbed to a 7-month high on increased risk aversion, while falling commodity prices hurt the commodity currencies. The Canadian dollar declined as crude oil fell below $35/ barrel in New York. The Australian dollar fell as the Reserve Bank of Australia minutes released today indicated further interest-rate cuts may be needed to revive the Australian economy.

* The EUR/USD fell and broke recent support after Moody’s Investors Service said it may downgrade banks with eastern Europe exposure. The euro is vulnerable to the worsening conditions in eastern Europe as eurozone banks have the largest exposure to central and eastern Europe. Debt deflation in eastern Europe is made more severe as companies and private households hold mainly foreign currency denominated debt. Meanwhile, local central banks hold mainly euro denominated assets as their foreign reserve assets, so the euro also becomes under pressure when the local central banks need to shore up their exchange rates by selling foreign (euro) assets. The EUR/USD looks likely to test the crucial 1.24-1.25 area support. If this is broken, the pair may fall to the 1.20 support. There are resistances in the 1.30 and 1.33 areas.

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Financial and Economic News and Comments

US & Canada

* The New York Fed manufacturing index fell to -34.7 in February, the lowest level since records started in 2001, from -22.2 in January, the Federal Reserve Bank of New York reported. The new orders index fell to -30.5 in February, also the lowest on record, from -22.8 in January. The shipments index increased to -8.1 from -13.1 and the inventories index improved to -8.1 from -19.3. The prices paid index increased to -13.8 from -18.2, while the prices received index plunged to -20.7 from -3.4. The employment index declined to -39.1 from -26.1. Overall, the figures indicate manufacturing in New York continued contracting in February amid a US intensifying recession.

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* US net long-term TIC flows in December rose to $34.8 billion from November’s downwardly revised -$25.6 billion, while total net TIC flows rose to $74.0 billion from November’s upwardly revised $61.3 billion, according to data by the Treasury Department.

* The NAHB/Wells Fargo US builder confidence index in February climbed to 9 from January’s record low of 8, still below the 50 reading signaling continued deterioration in the US housing market, the National Association of Home Builders/Wells Fargo reported.

Europe

* The ZEW eurozone economic sentiment index showed eurozone investor confidence increased to -8.7 in February from -30.8 in January, the ZEW Center for European Economic Research reported. However, the current conditions index declined to -91.0 from January’s -84.7.

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* The ZEW German economic sentiment index rose to -5.8 in February, the biggest gain since July 1993 and the highest level since July 2007, from -31.0 in January, indicating improvement in German investor confidence after the government’s stimulus measures, the ZEW Center for European Economic Research reported. However, the current conditions index declined to -86.2, the lowest reading in five years, from January’s -77.1.

*
UK consumer prices fell 0.7% m/m in January, the most for a year, after a 0.4% m/m decline in December, the Office for National Statistics said. The consumer-price inflation rate decelerated to a 9-month low of 3.0% y/y from December’s 3.1% y/y pace. Core consumer-price inflation, which excludes costs of energy, alcohol, tobacco and food, accelerated to 1.3% y/y in January from 1.1% y/y in December. Retail-price inflation slowed to 0.1% y/y in January, the lowest since March 1960 largely due to cheaper mortgage costs, from 0.9% y/y in December. Excluding mortgage interest payments, inflation slowed to 2.4% y/y from 2.8% y/y.

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* The DCLG UK house price index showed UK house prices fell 10.2% y/y to £195,317 in December, following a revised 8.5% y/y decline to £199,933 in November and a revised 7.4% y/y decline to £203,580 in October, the Communities and Local Government reported. House prices fell 6.4% q/q in Q4 2008 after a 3.0% q/q decline in Q3.

Asia-Pacific

* Japan’s machine tool orders plunged 84.1% y/y in January, final data from the Japan Machine Tool Builders Association showed, following an 84.4% y/y loss in December.

* Japanese Finance Minister Shoichi Nakagawa resigned amid accusations he was drunk at the G-7 press conference during the weekend. Nakagawa appointed Economic and Fiscal Policy Minister Kaoru Yosano to replace him.


Hans Nilsson 2009-02-17
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17.02.2009