The US Dollar is lower against nearly all of its major peers this morning as risk assets continue to recover from last week's volatility. Weak economic data out of the US is also weighing on the dollar this morning, with both housing and manufacturing data falling short of forecasts. New home sales tumbled to a five-month low of 298K versus the expected reading of 310K, and worse than last month's 312K. An index of manufacturing activity in the Richmond, VA area also disappointed, registering -10 after stagnating in the previous month, marking the worst reading in more than two years. Both reports reflect the overall slowdown in the US economy, much as it did at this time last year before Fed Chief Bernanke announced QE2. Coincidentally or not, Bernanke is set to meet with global central bankers later this week at an annual summit in Jackson Hole, WY, the same venue at which QE2 was first proposed. As such, investors appear to be optimistic that a QE3 program or another scheme to lower interest rates and encourage employment is forthcoming. The dollar has largely been relegated to wide ranges over the past month, but this week's meeting presents a potential turning point. Should Bernanke announce another round of quantitative easing or another scheme that would expand the Fed's balance sheet, the dollar will likely come under renewed pressure against its counterparts. However, should Bernanke stick to his recent stance that conditions are not acceptable for QE3 (i.e. inflation is too high), it would likely result in a continued selloff in risk-assets, thus benefitting the dollar at least for the time being.
The EUR retested its recent highs overnight at 1.45, but has since pulled back, remaining within its summer ranges. The initial bounce came after an encouraging PMI report for the Eurozone, which remained steady at 51.1 versus an expected drop to 50.0 with both services and manufacturing advancing. However, the better than expected PMI reading has largely been offset by declining confidence in the region with both Eurozone consumer confidence (-16.6 vs -12.4 expected) and ZEW economic sentiment (-40.0 from -7.0 in the previous month) missing their forecasts. Ahead of this Friday's meeting in Jackson Hole, the EUR will likely remain within its recent 1.40- 1.45 range.
Sterling remains relatively well supported at the 1.65 mark as it too pushed back towards the top of its recent ranges before pulling back this morning. With no major economic data out of the UK so far this week, the GBP has largely been moving in step with the EUR and other European currencies as investors focus on the US economy. The pound has also found support in surging demand for British government bonds as investors seek their perceived safety with both the US and Eurozone struggling with debt and slowing growth. The yield on the 10-Yr fell to 2.24% late last week, the lowest since records have been kept, on the growing demand.
The JPY continued to trade in a narrowing range overnight between 76.40 and 76.80 as the selloff in risk assets slows, at least for the time being. The yen has remained particularly well supported through the past month's volatile swings in stock prices and declining economic data worldwide, but its gains have been limited as Japanese officials have become increasingly outspoken about intervention every time the JPY looks to be headed for the 76.00 barrier. Intervention likely wouldn't prove effective in the longer or even medium term, but investors still don't want to see long positions prematurely stopped out due to government intervention.
The commodity currencies are generally well supported this morning with the exception of the ZAR. The price of oil continued to push back towards $85/bbl in a knee-jerk reaction to the escalating violence in Northern Africa and the Middle East, but copper and gold were both lower, down to $395/lb and $1880/oz respectively. The CAD is slightly higher this morning, supported by recovering stocks, and the rising price of oil, Canada's main export. The loonie has also remained supported after a Canadian government report showed that retail sales grew by the most in seven months. The AUD is higher on the rebound in investor risk appetite and after a report out of China, Australia's primary trading partner, showed that manufacturing in the Asian powerhouse unexpectedly gained last month. Strong economic results out of China prove supportive for the AUD because investors expect an increase in demand for Australia's exported raw goods and minerals like coal, copper and iron ore. The NZD was the best performer against the dollar, gaining by more than 1.25%, also benefitting from the encouraging data out of China on increased expectations that the RBNZ will hike rates in the coming months. The ZAR on the other hand, was the only loser against the USD overnight despite the rebound in risk appetite. The South African economy has been hampered by a wave of labor strikes over the past month, and little progress has been made to end the dispute thus far. Investors worry that should the strikes continue for much longer, the country's output will be effected through the remainder of the year.
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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..