The US Dollar is higher against most of its major counterparts this morning as a renewed wave of risk aversion grips the market. Much of the return in investor risk appetite as of late had been due to high expectations for a Eurozone summit slated for October 23rd. However, in the run up to the meeting, there have been conflicting reports about German and French policymakers building consensus. However, that apparent consensus appears to be crumbling as a report leaked yesterday that French President Sarkozy said that pre-meeting talks had stalled, and that policymakers are at an impasse. These fears have been compounded this morning on rumors that German policymakers are pushing to postpone the meeting. Meanwhile, mixed economic data released in the US has offset some of the negative sentiment. Weekly jobless claims registered slightly higher than expected at 403K, but down from last week's 409K. However, continuing claims did rise by more than expected to 3719K. Leading indicators and existing home sales both registered in line with expectations at +0.2% and 4.91M respectively. Philly Fed registered far better than anticipated at +8.7 versus an expected -9.4, and much improved from the -17.5 in the previous reading. However, with market volatility again on the rise, the pickup in manufacturing may be difficult to maintain, but it is an encouraging sign in the interim. With both stocks and commodities beginning the day in the red, the dollar will likely continue to outperform many of its peers in its role as a safe-haven currency.
The EUR is lower this morning on waning optimism over this weekend's planned EU summit. With rumors arising that the meeting may be postponed and that regional leaders remain divided, investors have begun to look beyond the meeting, realizing that even if it transpires it likely won't result in the end-all panacea that investors are hoping for. However, the common currency's decline has been more modest than might be expected, at least partially due to the Swiss National Bank defending the CHF's 1.20 peg to the EUR. With increased market volatility, investors have begun to test the SNB's resilience, shifting capital into the traditional safe-haven franc, causing the Bank to sell CHF and buy EUR. However, with the Eurozone's woes piling up, the EUR remains under immense downward pressure, likely pushing it back towards the lower end of its recent ranges over the coming days. There are increased signs that the regional debt crisis is spreading as well with yields on Italian 10-Yr government bonds surging past 6% this morning for the first time since early August when the ECB stepped in and aggressively purchased bonds to drive down the yields.
Sterling has been rather volatile overnight, fluctuating between gains and losses against both the USD and EUR amid reports that Eurozone policymakers are at loggerheads with one another. The GBP continues to benefit as a primary alternative to the EUR, but remains under pressure with the British economy continuing to struggle to stay afloat. This morning, BoE member Spencer Dale told reporters that world events have damped economic prospects for the UK and that the BoE expects a sharp drop in British inflation in 2012. These comments echo the dovish bias the Bank clearly has, and as such the pound will struggle to maintain any significant gains.
The JPY is relatively flat this morning despite the rise in risk aversion. Japanese officials have been talking about increasing steps to curb yen strength for some time now, and a leaked document from the Democratic Party of Japan reaffirmed those suspicions. The government will increase a fund to help Japanese companies cope with a surging yen to 10T JPY ($130B), set up five special economic zones, and encourage the BoJ to employ appropriate and bold monetary policy management. However, these actions will likely have little lasting material effect on the JPY, and another spike in risk aversion will keep the yen well supported.
The Commodity Currencies are generally lower this morning as both equities and commodities push into the red. Oil pulled back to $85/bbl, gold was off 2% to $1615/oz, and copper extended its decline to $315/lb. The CAD pared early gains as optimism over an improving situation in the Eurozone waned, and as the price of oil, Canada's main export, fell. The AUD also erased an early rise on fears that the global economy is slowing. While most commodities have staged an impressive rebound thus far in October, copper, a strong barometer of future global growth, has largely remained under pressure, suggesting a weak outlook for the global economy. The growth-sensitive AUD remains highly correlated to the price of copper, one of Australia's primary exports, and the recent drop has put the Aussie under pressure. The ZAR was once again the worst performer against the dollar overnight, tumbling by more than two percent on fears that policymakers in the Eurozone, the main destination for South African exports, are no closer to an agreement on expanding the region's bailout fund.
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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.