Bank Indonesia Raises Borrowing Costs

The Bank Indonesia increased the interest rates today for its third meeting in a row to efficiently fight the accelerating inflation caused by the growing food and oil prices.

The central bank voted for the interest rate to be raised from 8.5 percent to 8.75 percent. The only reason the government wants to hold the rates that high, despite the unpopularity of such measures, is the fastest price growth in Indonesia in the last 21months.

Although the rate of the Indonesian rupiah remains quite steady against the U.S. dollar since April this year, the USD/IDR rate may experience some decline, as this interest rate hike may cause more investors to secure their assets in the Indonesian currencies and get a higher yield.

The rate increase wasn’t a surprise for the market analysts — the growing fuels costs cause protests by the transportation workers world-wide and Indonesia isn’t the exception. Despite the fact that the high borrowing costs may hurt the position of the current President Susilo Bambang Yudhoyono on the general elections next year, the inflation remains the central bank’s main priority.

Banks Slash Rates; Pound, Euro, Franc Drop

The Europe’s currencies posted a daily drop against the U.S. dollar after showing a moderate volatility during the early trading session after the regional central banks cut the interest rates at an unexpectedly large scale.

An increased volatility on the Forex market was the direct reaction to the series of the interest cuts performed by the central banks of the United Kingdom, Eurozone and Switzerland today. Just after the surprisingly big cut by the Bank of England, pound began to recover against the dollar and the Japanese yen but after the Swiss National Bank and the European Central Banks also cut the rates, the pound and other European currencies went down.

Bank of England lowered the interest rate by 150 basis points today — down to 3 percent. The largest expected cut was 100 basis points and it wasn’t quite a popular forecast. Swiss National Bank cut the Libor target range by 50 basis points to 2 percent average. European Central Bank also slashed 50 basis points from the 3.75 percent rate, showing its conservative character even during the harsh crisis times.

Aussie, Kiwi Rise on China’s Stimulus Plan

The Australian and New Zealand dollars rose against the U.S. dollar and the Japanese Yen compared to the last Friday’s close levels as the China said that the government will provide $586 billion of liquidity help to the national economy.

The Aussie and Kiwi opened with a huge weekly gap against the dollar and the yen after the news that the Chinese economy, which is expanding at a fastest pace among the world’s largest economies, will get this additional stimulus. $586 billion will be injected gradually and will completely enter the market by the end of 2010.

Although the proposed plan is quite «slow», the traders and investors hope that it will help to revive the demand for the commodities, thus allowing Australia and New Zealand (which are the large commodity exporters) to maintain the better trade and current-account balances.

The news from China makes traders to believe that the global recession may not last for too long, spurring the confidence in such high-yielding currencies as the Australian and New Zealand dollars. Some Forex traders still believe that the carry trade may return to the market soon.

Chinese Yuan Depreciates to July’s Levels

The Chinese yuan fell to the weakest level since August today as the country’s government continued to manipulate its currency before the scheduled meeting with the U. S. Treasury Secretary.

The reference rate, set by the People’s Bank of China, allows 0.5 percent deviation in the either side during the daily yuan trading session. Today the rate was set to the lowest level since August 2008 and the daily trading led the currency below that level as the traders expected further depreciation.

China’s economic growth is declining; it reached the lowest rate since 2003 as the government tried to decrease the inflation with the strong yuan in the first half of this year. Financial crisis brought another stress factor for the Chinese export-orientated economy — developed countries decreased their demand for the China-produced goods, pressing on the production growth in the country.

According to many analysts the yuan will continue its decline, directed by the People’s Bank of China, as the currency rate manipulation is seen as one of the most effective method to stimulate growth.

U.S. Treasury Secretary Henry Paulson will try to convince the Chinese officials to tolerate more freedom for the yuan’s rate during the meeting on December 4th and 5th. U. S. President-elect Barack Obama also called for a stronger and more loose yuan control. Despite the pressure from the United States, it’s unlikely that China will refrain from using its currency as an economy’s growth locomotive.

USD/CNY reference rate was set to 6.8505 today and currency pair rose from 6.8330 to 6.8802 as of 9:06 GMT today, reaching the daily high at 6.8830.

GBP at Lowest Level Against JPY in 17 Months

The Great Britain pound today reached its lowest value against the Japanese yen since 11th of July, 2006, continuing the strong bearish trend that has started during early November 2007.

Since the pound has been a carry trade favorite long currency for a long time, it’s gained a lot of “overweight” against its Japanese counterpart - yen, and it now has a great potential in falling down as the carry trade positions are being closed by the majority of the Forex investors.

GBP/JPY touched a 209.99 level today and then retraced back from the psychologically strong 210.00 support level. But it is still trading with a daily loss of more than 0.2% making it a 4th straight bearish trading day for this pair.

There are other reasons for pound to depreciate against yen, even without the problems with carry trade. The Great Britain pound is experiencing rather bad times with the economy growth slowdown and the real estate sector slumping. Bank of England has to reduce the interest rates in order to stimulate the investments. But the lower interest rate makes the pound less attractive as a currency.

Another reason for GBP/JPY to head down so fast can be seen in a fast Chinese yuan appreciation, which is driving all other Asian currencies up. The yuan rose by more than 11% in 2007 against the U.S. dollar and is believed to gain near the same in 2008. Judging from the data received since the start of the year, China is acting to strengthen its currency. And strong yuan will certainly influence the yen, helping it to go up against the pound.

Canadian Dollar Slid This Week as Oil Declined

The Canadian dollar declined against the U.S. dollar for the second week in a row as the oil and commodities prices continued to drop on the worsening global economy outlook.

The Bank of Canada Commodity Price Index dropped to 181.63 this week — its lowest level since 2005, while oil prices dropped below $50. Commodity exports are very important for the Canadian economy as they constitute a large part of the country’s GDP and attract the foreign capital to the financial system.

From the fundamental analysis point of view the Canadian dollar has only one way — down, as it gets no support neither from the commodities nor from the positive interest rates difference.

But from the technical point of view, the USD/CAD currency pair iscurrently heading to form a double top pattern after declining on Friday this week. If the price corrects to about C$1.1500 per dollar the further decline may follow.

USD/CAD gained 2.3 percent this week — from 1.2381 to 1.2666. It declined down from 1.2971 to 1.2666 or 2.4 percent on Friday alone.

Rupee Declines More as Stocks Tumble

The Indian rupee continued to fall against the U.S. dollar and the Japanese yen today as the Asian stock markets fell again, spurring the outflow of the capital from the emerging markets.

The India’s central bank allowed the domestic companies to attract more foreign loans yesterday, lifting the limit imposed last year to cool down the financial markets. That effort failed to dwell the confidence into the investors’ hearts and the rupee fell today for a seventh day.

The problem with the availability of the funds for the Indian companies isn’t unique and it can’t be solved by the one-sided decision to lift the limits. The global demand for liquidity greatly exceeds the quite limited supply.

The Reserve Bank of India raised the limit for the foreign borrowing to $500 million in one financial year, allowing repatriation of the funds if they weren’t invested into the capital markets or real estate sector.

USD/INR rose from 49.290 to 49.745 as of 8:24 GMT today. INR/JPY fell significantly today — from 1.9882 to 1.9694.

Indian Rupee Falls to Record Low

The Indian rupee fell to the record low level against the U.S. dollar today as the Asian stock markets followed the path of the U.S. equities and declined strongly; the recession forecasts for 2008 and the first half of 2009 also played their role.

Dropping more than 1.2 percent today, the Indian currency followed the decline in the local benchmark stock market index, SENSEX, by more than 4.3 percent. Sales of the Indian assets by the international investors were spurred by the 7-year largest drop in the exports in Japan and deflation of the consumer prices in U.S. in October.

The minutes of the U.S. Federal Open Market Committee latest meeting, released yesterday, showed that the Federal Reserve forecasts the recession in the U.S. in the second half of 2008 and the first half of 2009. This plays a big role for the Indian economy, which is largely dependent on the United States.

According to the currency analysts, the rupee is going to remain under the pressure for as long as the negative trend in the global stock markets remains there. The demand for the dollar isn’t working good for the emerging currencies, such as the Indian rupee.

USD/INR went up from 49.84 to 50.48 as of 8:23 GMT today after reaching its absolute record maximum at 50.55 during the early trading session.

Yen Stops Growth on Stock Markets Optimism

The Japanese yen is showing another negative trading day this week as the currency traders follow the stock market optimism and buy the currencies associated with the high risk and yield.

The yen fell against the Australian and New Zealand dollars (its traditional carry trade counterparts) as the U.S. government and lawmakers are ready to bailout the Detroit automakers, spurring stock market rally and helping the high-yielding assets worldwide.

While the crisis is not over yet, the currencies and assets are already heavily oversold according to some analysts. There are good opportunities in Forex market that involve yen-selling in the favor of the high interest rate currencies. When the majority of the market participants understands that the runaway to the «save haven» is over the rallies on EUR/JPY and GBP/JPY will probably start.

USD/JPY rose from 92.28 to 92.80 as of 15:33 GMT today. EUR/JPY advanced from 119.27 to 120.91 coming close to its monthly high at 121.44, while GBP/JPY went up from 136.11 to 137.75 today.

Euro Near Weekly Lows before Rate Decision

The euro declined today against the U.S. dollar, almost snapping the yesterday’s gain, as the traders expect the weak data on the Eurozone retail sales after PMI shrank in the leading Eurozone economies.

The European currency came close to the lowest level in the last two weeks against the dollar and the lowest in the month against the yen. As the macroeconomic indicators show the worsening of the situation in the Eurozone’s economy, the traders expect that the European Central Bank will reduce the interest rate from 3.25 to 2.75 percent at its next meeting tomorrow.

The British pound follows the euro’s behavior and is advancing its weekly lows against the dollar and yearly bottom against the yen. The fundamental data from the United Kingdom make the market participant to think that tomorrow the Bank of England will cut the interest rate from 3 percent to 2 percent.

The poor economic outlook from both Great Britain and the Eurozone suggest that the rate cuts are necessary. Lower rates will continue to press on their currencies, analytics say. Even after these monetary policy meetings the rate reductions series may not be over yet.

EUR/USD fell from 1.2726 to 1.2614 as of 9:37 GMT today. EUR/JPY declined from 118.48 to 117.36, while GBP/JPY went down from 138.95 to 136.61 and renewed its more than a decade minimum. GBP/USD fell from 1.4919 to 1.4681 today.

Russian Ruble Near 3-Year Low vs. Dollar

The Russian central bank widened the trading band for the ruble today as the Russia’s main exports — crude oil and metals continued to depreciate on the global markets.

The Bank of Russia allowed the ruble to depreciate by 30 kopecks today at the beginning of the currency trading session. It was the fourth time since November 11 when the central bank allowed the ruble to decline against benchmark currency basket, which consists of 45% euro and 55% U.S. dollar.

The Urals crude oil, which is Russia’s main export commodity, fell to $39.34 per barrel yesterday — the lowest level since 2005. The Bank of Russia continues to spend the national foreign reserves to keep the currency from depreciating too fast, meanwhile, lowering its benchmark rate stepwise.

Currency analysts don’t believe that the Russian ruble may return to appreciation while the oil prices decline. The current price levels are already critical and they will certainly continue to press on the Russian currency.

USD/RUR rose from 27.820 to 28.061 as of 10:50 GMT today after reaching 28.110 — the new yearly high since February 2006. EUR/RUR went up from 35.637 to 35.799 and reached 35.920 during the trading session — the highest rate since October 8.

AUD Falls on Weak Business Confidence

The Australian dollar declined today against the U.S. dollar and the Japanese yen as the country’s stock markets fell after the report on the November business confidence came out showing the record low reading for the index.

The Aussie is also under pressure from the high-yielding assets’ correction after the yesterday’s growth. The New Zealand dollar, which often trades in a strong correlation with its Australian counterpart also fell today, but at a slower pace.

The business confidence survey for November showed a decline of the index from -29 to -30 — the lowest level since 1989 — the year when this survey was first conducted. Traders also expect a jump in the unemployment rate to be shown in the report which comes out this Thursday.

Currency analysts believe that the future of the risk-sensitive currencies (Aussie is one of them with its 4.25 percent interest rate) isn’t too optimistic. The stock sell-off may still continue in such countries as Australia and New Zealand and the strong dependence on the commodity prices will keep the currencies down for as long as the financial crisis is keeping the global economy from growing at a normal pace.

AUD/USD fell from 0.6647 to 0.6505 as of 8:20 GMT today. AUD/JPY declined from 61.74 to 60.10, while AUD/NZD went down only slightly today — from 1.2152 to 1.2122.

Chilean Peso Strengthens on Dollar Weakness

The Chilean currency appreciated to its monthly high against the U.S. dollar yesterday, as the greenback experienced a downfall against the high-yielding currencies and the peso performed better than the other regional currencies.

Yesterday’s growth of EUR/USD and GBP/USD allowed some of the emerging markets’ currencies to restore some of their value against the dollar. The Chilean peso was among such currencies and, while some of the Latin-American currencies failed to show a sustainable gain yesterday, the peso rose to the new highs since November.

Chilean economy, while being export-orientated, isn’t experiencing such problems as the oil exporters such as Venezuela or Brazil. Analysts expect Chilean GDP to advance at 3.8 percent in 2008 and about 1.8 percent in 2009, which is a good growth level, taking into account the predicted recession in many other countries.

Despite the fact that the Chilean peso is down by 23 percent against the dollar this year, the government isn’t spending its foreign reserves to support the national currency, but increases the budget spendings on infrastructure and housing, providing a stimulus for growth. Actually, the cheaper peso is one of the advantages that will probably help Chile when the crisis is over.

USD/CLP declined from 648.25 to 640.75 during yesterday’s currency trading session in Chile, reaching its lowest value since November 14 at 639.60.

Aussie Reaches 2-Month High versus Dollar

The Australian dollar rose slightly against the U.S. dollar and reached a new 2-month high level today as the dollar still suffers from the near zero interest rates set yesterday by the Federal Open Market Committee.

The Australian currency rallied by the most since October after the Fed announced the rate cut yesterday and the global stock markets reacted with the growth. The demand for the high-yielding assets went up as the cheap dollars will provide markets with enough liquidity.

Analysts believe that the Fed’s decision will help the U.S. economy to gain a second breath and overcome the most important troubles. On the other hand the rates floating between 0 and 0.25 percent is a huge negative factor for the U.S. dollar, which will benefit such high-yielders as the Aussie and the NewZealand dollar.

AUD/USD rose from 0.6932 to 0.6935 as of 10:00 GMT today and reached its daily maximum at 0.7024 — the highest level since October 21. AUD/JPY fell from 61.63 to 61.28.