The US Dollar begins the day on the defense as generally strong risk appetite weighs on the dollar's appeal. Global financial markets have been shaky for the past week, and investors have been apprehensive to assume riskier positions in light of political unrest in Egypt. However, demonstrations have been relatively peaceful since the Egyptian military took control of security in the country's major cities, and the wave of unrest has yet to spread to more volatile neighbors like Yemen or Syria. While the situation does remain tense, investors appear confident that the demonstrations will result in a peaceful, and market-friendly, solution in which oil shipments through the Suez Canal continue unimpeded.
Generally positive economic data in the US has also encouraged investors that the US economic recovery is gaining momentum. Yesterday, Personal Spending data gained by 0.7%, up from the prior reading of 0.4%, and besting expectations of a 0.5% gain. Chicago PMI also exceeded expectations at 68.8, versus the anticipated 64.5. ISM Manufacturing data released this morning, registered 60.8, better than both the 58.0 expected and the prior reading of 57.0. Markets however, remain squarely focused on this Friday's Nonfarm Payrolls and Unemployment reports, both expected to show a modest decline from last month.
The Euro posted solid gains in overnight trading, and has continued its move upward this morning, touching the highest levels against the dollar since November. Investors have been encouraged by rumors that European officials are nearing agreement on a plan that would allow the $600B Euro Zone rescue fund to purchase bonds directly, rather than offer bailout loans. Sovereign spreads have decreased significantly on the news, with yields on the Portuguese 10-year bond for instance dropping below 7% for the first time in more than a week.
Sterling had a strong showing overnight, rising to its best levels in three months as improved market sentiment bolsters the relatively hawkish outlook from the BoE. Better-than-expected PMI Manufacturing data, registering 62.0 versus the anticipated 58.0, suggests the British economy, while facing significant hurdles, continues to slowly expand. More important for the GBP however, was evidence that while PMI grew at the fastest pace since at least 1992, input costs also increased at record pace. With intensifying inflationary pressure in the UK, investors have begun to price in multiple interest rate hikes, which could start as soon as in the second quarter. However, with nascent overall growth, tighter monetary policy could prove prohibitive in the longer term and British exporters surely don't long for a stronger GBP.
The Yen and CHF also both posted gains on broad dollar weakness. These gains however, may be short lived with financial markets turning positive and risk appetite on the rise, reducing both the yen and franc's appeal as 'safe haven' instruments.
The AUD was the strongest performer overnight, gaining over 1.5% against the USD with investors again seeking the higher yields. The dollar's push back above parity with the USD however, may be only temporary as a powerful cyclone bears down on the Queensland region, threatening to dump another three feet of rain on the already water-logged coal mining hub. Generally strong commodity prices and robust global demand will however keep the AUD supported in the near term.
The CAD gained by the most in a month on strong economic data out of the country's largest trading partner, the US, and decreased fears over tensions in the Middle East. The loonie has not however, been able to gain quite as sharply as the other currencies it is often associated with, such as the AUD and NZD, after comments from the Canadian Finance Minister in which he projected that Canada will have a challenge with jobless number in 2011. However, with strong economic data out of the US and rising commodity prices, the loonie appears set to extend its gains throughout the day.
Indications of Overnight rates:
10-Year Treasury Note Yield: 3.439%
Dow Jones Industrial Average: 12002.77 +0.92%
This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.