JPY Rallies Of Safe-Haven Flows

The yen was the biggest gainer at the start of the week as safe-haven flows propped up the Japanese currency, pushing it to 138.12 against the sterling and 117.45 versus the euro. The greenback also edged higher against the majors, surging versus the pound to 1.4805 while edging up toward the 1.26-region against the euro.

With revelations from the NBER that the US economy has been in a recession since December 2007, the major US stock bourses collapsed as the Dow Jones sank by 7.7%, and both the Nasdaq and S&P 500 plunging by nearly 9%. The selling accelerated following comments from both Fed Chairman Bernanke and US Treasury Secretary Paulson.

Bernanke acknowledged the predicament the Fed finds itself in and expressed further pessimism over the economic outlook. He said, Although further reductions from the current federal funds target of 1% are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited. Moreover, he expects the economy to remain weak for some time. Bernanke also suggested the Fed could purchase longer-term Treasuries or agency securities on the open market in substantial quantities in an effort to spur aggregate demand.

The economic reports from the US on Monday included November manufacturing ISM and October construction spending. The manufacturing ISM report declined more than expected to 36.2 versus expectations for a smaller drop to 38.4 from 38.9 in the previous month. November ISM prices also dipped sharply, falling to 25.5 from 37.0 in October.

The key US data highlights for the week ahead include October durable goods orders and Friday¡¯s jobs data. The November unemployment rate is estimated to creep higher to 6.7% from 6.5% in the previous month while non-farm payrolls are expected to balloon to 300k versus 240k in October.

Traders will also closely scrutinize global central bank decisions, with the RBA, ECB and BoE all scheduled to announce results. The Reserve Bank of Australia, which releases its decision tonight at 10:30pm, is expected to cut its benchmark lending rate by 75-basis points to 4.5% from 5.25%. The ECB and BoE are both likely to cut rates by 50-basis points. Given the current economic outlook and heightened risk for a deep and prolonged global recession, the risk is for more aggressive rate cuts from the central banks to stimulate the economies.

MG Financial Group
http://www.mgforex.com

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