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As of February 2008

U.S. Currency, U.S. Fixed Income, & Commodities

by Manpreet Hochadel, CFA, and Simreet Gill
JPMorgan Investment Analytics and Consulting
manpreet.s.hochadel@jpmorgan.com, simreet.k.gill@jpmorgan.com

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The U.S Dollar continues its decline against both the Euro and the Yen, as concerns grow over declining U.S. economic prospects and the need to further lower short-term interest rates.
The European single currency closed the month of February at $1.518, the highest it has been since its inception in 1999.

With evidence of further weakening in the U.S. economy, the U.S. Federal Reserve has lowered its targeted Fed Funds rate by 125 basis points since the beginning of January 2008.
However, the fixed income markets remain concerned that low interest rates may lead to rising inflation and erode the purchasing power of longer term instruments, which has resulted in the steepening of the yield curve.
Rising inflation and a weak U.S. Dollar spurred short covering and fresh buying, pushing silver up 11% and gold 2.5%. At this stage, subdued physical demand is more than offset by robust investor demand.

by Simreet Gill
JPMorgan Investment Analytics and Consulting
simreet.k.gill@jpmorgan.com

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The U.S. Dollar's decline year-to-date has been unusually broad, falling versus high and low-yielders alike, to be down almost 3% in trade-weighted terms over January and February.
Sterling appreciated against the USD in February, but the moves were not as severe as the appreciation in the EUR/USD exchange rate.

The Bank of Japan does not consider the Yen to be strong (it is near multi-decade lows in trade-weighted terms). The European Central Bank (ECB) has little interest in a weaker currency given its focus on containing inflation. The U.S. Federal Reserve appears to welcome the stimulus from a weaker currency and has already signaled its preference for growth over price stability in the near term.
AUD continues to garner support from the prospect of higher interest rates, in addition to elevated commodity prices and U.S. Dollar weakness.

by Simreet Gill
JPMorgan Investment Analytics and Consulting
simreet.k.gill@jpmorgan.com

Click to enlarge

Liquidity concerns have rematerialized both in the UK and globally. 3-month GBP LIBOR fixings have been nudging higher, with the spread to base rate back to the level seen at the start of January, and GBP money markets are pricing increased liquidity concerns going forward.
3-month and 6-month JPY LIBOR rose by 3-4 basis points while TIBOR has been unchanged, suggesting funding difficulty in JPY by non-domestic banks as opposed to USD or EUR.