httpvh://www.youtube.com/watch?v=o453HgRvVQs

Weakness in financial markets remained on Friday as there has been little real progress made towards the solution of the three major economic problems surrounding the global economy at the moment. The first one is the lack of growth in the United States, and to a certain extent in the wider global economy. The second is the obvious crushing debt problem the European Union continues to face while the third is the possible intervention by central banks to weaken their currencies in the face of risk-off flows.

We’ll start with the first and the poor manufacturing data out of the US. We saw that the Philly Fed on Thursday was much worse than expected signifying a continual slow down in the industrial side of things on the other side of the pond while secondly the Michigan consumer confidence number was also a lot worse than expected signifying a potential slowdown in consumer spending in the US. While there are fears of another recession in the US we are still of the opinion that the picture will be one of tepid growth as opposed to one of shrinkage. Even so, it looks like this Friday’s latest confirmation of Q2 GDP figure will be revised lower to 0.7% from 1.2%. Friday is also the day that Federal Reserve Chairman Ben Bernanke speech from the Jackson Hole Economic Symposium; this is the same speech that launched QE2 last year. We do not expect similar measures to be announced this month however.

Over to Europe and the problems that we’ve warned about (contagion and a lack of credibility) in the past few months have come to the fore. The contagion reached France and you have to wonder how sustainable France’s AAA level is given the market is pricing a default as 2½ times more likely in France than in America. Were France to wobble it would come down to Germany being the sole contributor to the European Financial Stability Fund and on the hook for a lot more than anybody wants. The ECB intervention to buy Greek and Spanish debt can be thought of as successful, if the sole mission was to lower bond yields, but this is not a sustainable action in the long term and the market is starting to come round to our belief that the sole solution for the Eurozone is a full fiscal union backed by Eurobonds.

The intervention story is roughly the same as the one that I left you with. Both the Swiss National Bank and the Bank of Japan are looking at weakening their respective currency in a bid to protect their exporters. USDJPY fell to a post-war low of 75.95 on Friday and the odds of intervention have risen dramatically as a result. Once again, much like the European debt crisis, intervention is at best a short term effort, and both the yen and Swiss franc will remain strong as the global picture remains rocky.

Today’s data calendar is quiet and we expect FX markets to take thir cues from equities and commodities today; equities are falling with gold hitting all-time highs onec again this morning so we expect the euro to remain sold through the session.

Latest exchange rates at time of writing