- US consumer spending rises by more than forecast; confidence gains;
- Fitch tells market that Greek deal would constitute a default, and Italian bond auction is undersubscribed;
- The JPY consolidates below 76.0 despite the government's effort to slow the appreciation.

The US Dollar is mixed after yesterday's precipitous drop against all sixteen of its major peers. The pause comes as the initial euphoria over the Eurozone debt plan wanes and there are renewed signs of the underlying economic deficiencies in the EU economies. Nevertheless, the USD still appears headed for its third weekly loss and remains near its worst levels in more than seven weeks against the EUR. Mixed economic releases here in the US have also crimped investors' risk appetite this morning despite yesterday's encouraging GDP figures. Personal spending met expectations, expanding by 0.6%, up from 0.2% in the previous reading, but personal income fell short of expectations at 0.1% versus the 0.3% forecast. Combined with a recent report that showed the personal saving rate falling to the lowest levels in four years, today's data suggests that the increase in spending is not due to rising incomes. While consumer confidence is improving, as shown by today's U. of Michigan confidence index (60.9 versus 58.0), lower wages and savings could spell disaster should the economy falter in the fourth quarter.

 The EUR remains towards the top end of its recent ranges this morning despite new questions over the Eurozone's ongoing debt concerns. One of the key tenants of the much lauded EU debt deal was an agreement with private bondholders to accept a 50% haircut on Greek debt holdings. However, this morning, Fitch Ratings announced that it would consider the plan a default. Moreover, Italy sold less than its maximum target of bonds at a government auction. The yield on Italian 10-Yr bonds spiked higher to 5.998%, near the levels reached this past August that prompted the ECB to step in and buy government bonds. Much of the run up in the common currency also came after news broke that China was interested in contributing to the regional bailout, but no overtures have yet been made and a report this morning showed that the Chinese authorities were demanding more details before making a decision. In the near term, the EUR will likely remain well supported, but with the much awaited EU summit now in the rearview mirror, investors will again focus on the ongoing fiscal struggles in countries from Greece to Italy.

Sterling is higher this morning against both the EUR and USD as optimism over the EU's plan recedes. British government bonds reversed early losses after Italian yields rose to near record levels at an undersubscribed debt auction today as investors sought the relative safety of the British assets. Nevertheless, British economic data remains excessively week with UK consumer confidence falling to a two and a half year low this morning and personal spending slowed. Increased demand for gilts has led the GBP to its third consecutive weekly gain against the USD.

The JPY consolidated towards the top of its recent ranges, well entrenched below 76.0. Japanese officials are clearly uncomfortable with the strong yen, but their efforts to weaken the currency have been largely ineffective. As such, the BoJ is encouraging the Japanese government to aid Europe as it struggles with soaring debt. By helping ease the Eurozone's woes, policymakers hope that the yen would lose some of its appeal as a safe-haven and European demand for Japanese exports would increase. However, the Japanese economy continues to face a precarious road ahead with the Japanese debt load expected to exceed $13T this year, more than the output of the entire Eurozone economy.

The commodity currencies are mixed this morning, but largely remain towards the top of their new higher ranges. Raw goods pared some of yesterday's steep gains with oil falling back to $93/bbl, gold was down to $1745/oz and copper was flat at $370/lb. The CAD is higher this morning on the relatively high price of oil, Canada's main export, and on the stronger than expected personal spending data out of the US, Canada's main trading partner. The AUD and NZD are also both higher this morning, headed for their biggest weekly gain in more than ten months as the increased appetite for risk has supported both relatively high yielding currencies. The ZAR was once again one of the best performers overnight, extending its weekly gains against the USD to more than 5%.

10/28/2011

CURRENT

CHANGE FROM CLOSE

EUR/USD

1.4165

0.25%

USD/JPY

75.77

-0.28%

GBP/USD

1.6135

-0.22%

USD/CAD

0.9944

0.35%

USD/MXN

13.1000

-0.35%

USD/CHF

0.8629

0.34%

AUD/USD

1.0715

0.19%

NZD/USD

0.8217

-0.12%

USD/ZAR

7.7111

-0.23%

USD/CNY

6.3595

-0.01%

10-Year Treasury Yield:

2.3149%

0.0816

Gold:  

 $ 1,743.50

 $ (4.20)

Copper:  

 $ 370.10

 $ 0.90

Crude Oil: 

 $ 93.17

 $ (0.77)

DJIA:

                   12,211.97

3.18

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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.