Written by A Forex View From Afar on Wednesday, September 03, 2008
U.S.
Business Cycle: The U.S. economy is now in the Trough phase of the business cycle, after it experienced a steep decline in the last quarter of 2007 and in the first quarter of 2008. The economy was helped in finding a bottom in the second quarter of 2008 by the rebate checks and the strong exports, but the outlook is not too great either. The economy is expected to crawl into the second half of 2008 and find a decent pace of growth only somewhere later in 2009. In the first months of the contraction phase the global economy was resilient to the U.S. slowdown. As things progressed the global slowdown started to be felt by almost every overseas economy, while the U.S. economy had already bottomed. The issues over mortgage lending criteria, introduced in 2002 to stimulate another period of weak housing, came back in the form of bad debt, but now not just U.S. debt problem. Global Markets bought the U.S. mortgage debt, not really expecting a slow-down in the U.S. economy. That debt now needs servicing and if the sub-prime U.S. home owners decide that they cannot pay the bill, there will be a lot of Inter-Bank re-alignment of those holdings.
Swap Interest Rate: 2.0% is the overnight interest rate after the Fed cut 325 basis points over a very short period of time. Most analysts agree that the Fed will raise somewhere in 2009, before they look to cut.
Euro Area
Business Cycle: The euro-area economy contracted for the first time in its short history in the second quarter in 2008. However, the ECB officials called this contraction “technical”, citing the strong read in the first quarter, and have affirmed that Q1 and Q2, as Q3 and Q4 should be judged together. Analysts expect growth to pick up somewhere in 2009, lead by the German economy, which is seen as a powerhouse in the area. The Euro-zone has a much diversified economy that backs the strength of the Euro-zone business cycle. The Euro-zone economy is seen by many as the most diverse economy in the world, and therefore, is not susceptible to other individual region’s economic highs and lows.
Swap Interest Rate: 4.25% is the overnight interest rate, a strong rate that justifies the Bank’s objective of assuring price stability over the medium term (seen as 18 months)
U.K.
Business Cycle: Once a shining economy, but now near the edge of a deep recession is the U.K. economy. The U.K. economy has to pass through some tough times ahead, the housing market is declining at a very strong pace, the financial system is moving at a sluggish speed and inflation is way above the comfort zone. Recently, Chancellor of the Exchequer Alistair Darling said “The U.K. is facing arguably the worst economic crisis for 60 years". The recent business cycles have shown the U.K. economy likes to follow in the footsteps of the U.S., and this is what is happening now. The Service sector and the City of London –the financial headquarters- dominates the UK Business Cycle, while tourism is the main driver of economic stability in the region.
Swap Interest Rate: 5.00% is the overnight interest rate; a strong rate that was needed to control inflation was reduced by 0.25% in December 2007 and April 2008, to respond to the economic downturn.
Australia
Business Cycle: 26 years of uninterrupted growth characterizes the Australian economy. However, some suggest the economy has peaked and is heading toward the Contraction phase which is attributable to the global slowdown and its affect on the economy. The housing market, which was renowned in the financial world, recently slowed down the pace of growth, and consumers are affected by it. The Australian economy is based heavily on commodity exports and the recent selling of the raw material markets can only have a downward effect over the real economy.
Swap Interest Rate: 7.00% is the overnight interest rate that is paid to hold AUD Long, minus the rate of the currency on the other side. The bank recently cut the interest rate by 25 basis points to assure a reasonable growth.
Japan
Business Cycle: Japan has a very interesting and unique history, full of legend and fearless worries. At the same time, the Japanese economy is unique and interesting too, however, not in an encouraging economic way. The Japanese economy has been fighting stagflation (no growth together with inflation) for almost a decade now. Nevertheless, these days the stagflation era is slowly turning into a period of recession with a high degree of inflation. Consumers that are continuously saving and a cultural environment that has no peers could easily characterize the financial landscape. The real economy is not moving anywhere, and the Bank of Japan has its hands tied because the overnight rate is at a dangerously low level.
Swap Interest Rate: 0.50% is the overnight interest rate, the lowest in the world. The central bank and the Finance Ministry have repeatedly said that rates should go up, but until the real economy shows any signs of growth this will not happen. The markets look to go short the JPY currency Pairs to earn interest. For example: Eur/Jpy trade held Long equates to; buying the Euro Zone Interest Rate of 4.25% and selling the Japanese Rate of 0.5%, a net profit of 3.75%. Welcome to the Carry Trade.
Canada
Business Cycle: The Canadian economy had been expanding well over the course of 2007, however, the Canadian business cycle moved into the Contraction phase at the same time that the U.S. did. U.S. As Canada’s biggest trading partner, having the bilateral good trades reaching the equivalent of $1.5 billion a day, the U.S. is an important gauge of potential Canadian strength. Having such a background it is normal that the Canadian economy closely follows the U.S cycles.
Swap Interest Rate: 3.00% is the Overnight Interest Rate after the 0.50% drop in February.
Switzerland
Business Cycle: Switzerland has the biggest financial sector in the world compared with the size of the economy. In fact, the economy is based on the service side, and is renowned for the strength and confidentiality behind the Swiss banks. In the last quarters, the Swiss economy has showed it is resilient to the global slowdown, even if banks (one of the countries’ biggest industries) suffered huge losses from the credit crunch. The Swiss economy has two unique characteristics: the economy rarely suffers from “boom and bust cycles” and Switzerland has one of the highest costs of living in the world (which is offset by the taxes).
Swap Interest Rate: 2.75% is the overnight interest rate, only higher than the dollar and the yen. The Markets can be Short the CHF currency Pairs to earn interest. For example: A Gbp/Chf trade held Long equates to; buying the U.K. Interest Rate and selling the Swiss Rate, and netting the profit. The Swissy (Usd/Chf) is a strong indicator of intra-day US$ sentiment, it tends to move faster and to be more reactive to US$ changes than any other major pair. The Swiss National Bank is listed on the Swiss Stock Exchange (SNBN symbol)
New Zealand
Business Cycle: New Zealand has just passed the Peak of the business cycle, confirmed by the latest news releases. Inflationary pressures have built to an extremely high rate as imports flood the economy, but recent developments have lead to a reversal of such trend. The economy is largely based on the export of raw materials.
Swap Interest Rate: 8.00% is the overnight interest rate, the highest in the countries with an AAA (investor grade) bond rating. The bank recently cut the overnight rate 25 basis points, after it held at 8.25% for almost a year.
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