Dollar strength gained momentum this morning after a week of mixed trade with US economic data beating expectations. Weekly Jobless Claims were down 39K from last week, registering 415K versus the expected reading of 420K. Continuing Claims also dropped, falling to 3925K, down from 3991K prior. ISM Non-Manufacturing also surprised to the upside, jumping to 59.4, besting expectations of 57.2, and growing at the fastest pace since 2005. The ISM services measure covers nearly 90% of US economic output, suggesting that the world's largest economy is in fact turning the corner from recovery to healthy expansion. However, with the pace of expansion not yet sufficient to improve conditions in the labor market, all eyes will be on tomorrow's Non Farm Payrolls and Unemployment reports to see if the recent jolt in productivity will translate into more jobs.
The greenback has also gained this morning as oil prices continue to ease, but markets do remain on edge over unrest in Egypt. Demonstrations turned violent overnight as pro and anti government factions clashed, with the Egyptian army attempting to keep the peace. The tone of the demonstrations has also grown increasingly hostile towards Westerners as the anti-government protestors' patience runs thin with food and supplies becoming increasingly difficult to secure. However, with fear that the protests would impede oil shipments through the Suez Canal receding, the pressure from rising crude prices has begun to ease. With strong economic data out of the US gaining the market's attention, investors have shifted their collective focus towards the health of the world's largest economy.
The Euro is sharply lower this morning, snapping its three-day winning streak, and tumbling from its 12-week high against the USD. The precipitous drop came after the ECB held rates steady, and rather than ratcheting up the hawkish tone on recent inflation data, ECB President Trichet stated that the Bank found inflation risks to be broadly balanced. The unexpectedly dovish turn from the perennial inflation-fighter took markets by surprise and prospects dimmed for higher interest rates in the Euro Zone, at least in the near term. The comments however come after European inflation accelerated last month at the fastest pace since October 2008, which had most expecting the ECB to tighten monetary policy before the Fed begins to normalize rates from their current ultra-accommodative stance. With reduced expectations for higher interest rates and continued worries over unrest in the Middle East, the common currency may test the lower end of its recent ranges in the near term.
Sterling is also lower this morning on broad USD strength, but its drop has been far more moderate than that of its mainland European counterpart. Strong economic data out of the UK has provided support for the GBP with PMI Services beating expectations of 51.3, registering an impressive 54.5. With all three components of PMI (manufacturing, construction, and services) showing strong signs of expansion, investors have begun to give credence to the growing faction of BoE members calling for a hike in interest rates. With this week's strong data, it appears that contraction in Q4 '10 GDP may have been a temporary setback, distorted by inclement weather. However, further gains for the pound will likely be tempered as investors remain on edge with global financial markets barely in the black this morning.
The Yen has seen a swing wider than a percent overnight on conflicting factors driving markets. The JPY first fell in the Asian trading session as investors' risk appetite begins to return with fears easing that the unrest in the Middle East will force higher commodity prices. However, dovish commentary from the ECB supported the yen on broad euro weakness. The euro/yen pair tumbled from its highest levels since November as expectations of higher interest rates in the Euro Zone diminish.
Scandinavian currencies are also lower on signs that recent currency strength is hindering growth in exports. The SEK dropped by more than a percent after earning reports from truck-maker Scandia AB missed forecasts, citing the negative effects of a krona that had gained to the strongest levels against the EUR since mid 2008. The DKK is also lower this morning on broad EUR weakness with the krone strongly correlated to moves in the common currency. The recent pullback in oil prices has also hit the NOK, as Norway is the world's fifth-largest oil exporter.
The Commodity currencies were little affected by the wild ride seen this morning in other G10 currencies. With no further major economic data due out of Australia this week, trade in the AUD has been rather quiet as it consolidates towards the top of its recent ranges above parity with the USD. The CAD on the other hand, has been a bit more volatile, with strong economic data in the US, Canada's largest trading partner, and dovish comments from the ECB providing support. Gains have however been capped by easing oil prices as fears diminish that the flow of oil shipments through the Suez Canal will be impeded by Egyptian demonstrations. CAD investors will be closely monitoring tomorrow's labor data due out of the US. A strong release could see the CAD strengthen further above parity with the USD as growth in Canada's largest export market is positive for the Canadian economy.
Indications of Overnight rates:
10-Year Treasury Note Yield: 3.4991% +0.022
Dow Jones Industrial Average: 12033.73 -0.07%
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.