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RussianThe US Dollar has gained in early trading as yesterday's risk rally quickly evaporated. Late yesterday afternoon, the IMF and EU announced their commitment to providing further aid to Greece on the condition that PM Papandreou is able to pass through strict austerity measures after surviving a confidence vote earlier this week. However, it doesn't seem that building consensus in Greece is as easy as it might sound, and markets are again expecting the worst this morning after a key Greek lawmaker expressed his concern with the new budget measures. Meanwhile, US economic data registered slightly better than expected. Q2 GDP was upwardly revised to 1.9% and personal consumption registered in line with expectations at 2.2%. Durable goods orders gained overall by 1.9%, better than last month's 2.7% contraction, but with the volatile transportation component stripped out, orders expanded by a less impressive 0.6%. US markets are also under pressure after budget talks fell apart on Capitol Hill yesterday afternoon. With the deadline to raise the debt ceiling just weeks away, Republicans and Democrats still seem far from consensus. With risk aversion again driving markets this morning, the dollar will likely retest its recent highs against many of its major counterparts as we head into the weekend as it maintains its role as a relatively safe investment, at least for the time being.
The EUR pared yesterday's late gains on lingering concerns that Greece will not meet the conditions to receive further funding from the IMF and EU. However, the common currency's precipitous drop has been slowed by stronger than expected data out of the region's core economies. Most had expected a decline in the IFO, signaling that German business confidence was beginning to erode. Nevertheless, the measure managed to post a gain over last month, registering 114.5, just shy of the record high of 115.4 posted back in February. However, while the region's large economies appear to be weathering the worsening sovereign debt crisis, the euro remains vulnerable to risk aversion. Ahead of next week's key austerity votes in Greece, the EUR will struggle to post any lasting gains.
Sterling is headed for a fourth weekly decline against the dollar as investors expect that the BoE will maintain their lax monetary policy to counter slowing growth. Minutes from the Bank's last meeting showed that members voted 7-2 to maintain current policies, and it looks as if a growing faction may actually be leaning towards easing. The pound has posted an overnight gain against the EUR, trimming the first weekly decline in the past three, but it too remains vulnerable to gaining risk aversion.
The JPY consolidated in its recent ranges overnight, supported in its role as a safe haven currency. However, it does appear that the yen may be yielding its role as the de facto safe investment to the CHF, which may in part be due to the costs from this year's natural and nuclear disasters. A government report today showed that damage from the earthquake and tsunami in February will likely eclipse 16B JPY, nearly double the cost of the 1995 Kobe earthquake. This early estimate does not include costs associated with the nuclear disaster at the Fukushima power plant.
The Commodity Currencies are lower this morning as investors shift capital into the lower yielding, but safer USD, JPY and CHF. Oil continued its decline, falling to $90/bbl, gold dropped to $1508/oz, but copper unexpectedly rose to $411.75/lb. The CAD dropped for a third straight day, heading for a weekly and monthly drop on the falling price of oil, Canada's primary export, and rising risk aversion. The AUD also extended its recent declines, but by far less of a margin than its commodity-linked counterparts. The rising price of copper, one of Australia's primary exports, has helped to support the Aussie after a strong US durable goods report suggested that the outlook for manufacturing is brighter than previously thought. The NZD and ZAR, on the other hand, posted steep declines as continued worries over Greek debt prompted investors to seek safety. With the Eurozone accounting for more than 45% of South Africa's exports and 34% of its imports, the rand was the biggest loser against the USD overnight. With a near 70% positive correlation with the EUR, the rand will struggle to post gains in the near term despite its relatively high 5.5% yield.
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