Currency updates

For whatever reason, the pound is seeing the majority of volatility among the major currencies over this holiday period, with EURGBP having swung wildly from all the way above 0.9800 to as low as 0.9440 in the Asian session before rallying sharply again in the European session to 0.9600 as of this writing. UK Mortgage Approvals for November were an anemic 27k - down an unbelievable two-thirds from year ago levels and even more from the highest numbers of the last couple of years. The housing crunch has descended on the UK even more swiftly than it did on the US. Still, looking forward, we wonder how much longer the pound can maintain its recent downside momentum after losing an astounding 15.6% vs. the Euro and 16.0% vs. CHF in December alone. For the year, the loss in value ran to about 30% vs. the EUR and CHF. The next Bank of England meeting is already up on Thursday of next week and one has to wonder if this meeting might be the pivot point for the pound. Certainly, the clip at which the pound has been losing ground has better odds of giving the MPCs pause for rapid further cuts. Already at the last meeting, a hundred-basis point cut was rejected due to fears of its effects on the pound.

EURUSD attempted a move below the recent 1.3915 line in the sand, but found support a few notches lower as the pair seems to want to remain in consolidation/range mode rather than starting a downward move in the thin holiday trading. Watch out for the US ISM report later today. Another slightly decline to 35.4 is expected after 36.2 in November. the lowest level for this survey ever measured in this report's 60-year history was 29.4 in 1980 in the desperate days of stagflation and drastic action taken by Carter and the Volcker Fed to fight inflation (almost the diametric opposite of the kind of action going on today, ironically enough). At some point in the coming few months, however, this survey will begin to rise due to its "comparative" nature - in other words, things can stabilize at a bad level and then the survey can return to 50. All of the regional surveys surprised to the upside slightly this month, and the Philly Fed and Chicago PMI actually rose slightly last month. EURUSD still looks too expensive relative to interest rate differentials, but let's see if the market is paying any attention to these.

JPY crosses have rallied on further signs of strength in equity markets, and perhaps as the world is looking for a rally in risk to start the year now that the books have been closed on the old year and many are sitting around either still with their old troubled assets or large piles of cash. The theory goes that some will want to put those piles of cash "to work". We'll see - certainly risk often tries to anticipate better times before they occur, but things look awfully dim at the moment and we would expect any broad based rally in risk to quickly founder on continued waves of bad news. See the benchmark USDJPY in the chart below.

Chart: USDJPY

USDJPY has been in a very well organized downtrend for some time and appears to be threatening a couple of key levels that suggest it may be moving into a consolidation/ranging environment if it continues higher. 90.95 was the old low and this gave way today. As well, the falling trendline is under threat here, as is the 21-day moving average (in blue).