The US Dollar is lower against most of it major counterparts ahead of a key Fed FOMC interest rate policy decision due later this morning. In light of recent mixed economic data and increased dovish rhetoric from Fed policymakers, investors have increased bets that the central bank will keep interest rates at their historic lows and possibly unveil further economic stimulus. In years past, the Fed has hinted at forthcoming quantitative easing policies months in advance, but should QE3 now be upon us, this time has been a bit different. Last November, when the Fed unveiled QE2, inflationary pressures were nascent, with CPI registering 1.2% YoY. Despite a recent slowing, CPI is nearly 4% at present. The unemployment rate remains unacceptably high, but it's questionable if either QE program had a direct positive impact on the labor market. A report from private payrolls provider ADP released this morning showed the economy gained 110K private sector jobs and expected layoffs pulled back from last month's spike higher. Nevertheless, investors will pay close attention to today's Fed decision and the central bank's outlook for growth, inflation and employment. In light of recent positive economic data, no immediate action from the Fed is expected, but a surprise unveiling of QE3 would likely send the dollar lower.
Overnight, the EUR recovered some of its recent steep losses as the US Fed steals the spotlight, at least for the time being. Markets were sent into a dizzying downward spiral late Monday afternoon after Greek Prime Minister Papandreou proposed a public referendum on accepting the bailout package that the rest of the Eurozone toiled over for the past several months. While the Greek parliament apparently supports PM Papandreou's calls for a referendum, he was called to meet with German Chancellor Merkel and French President Sarkozy in private ahead of a G20 summit. However, with rumors prompting a massive shift in capital, investors remain reticent to reenter long EUR positions wholeheartedly. Eurozone members have also been hard hit by the declining confidence with the yield on not only Greek, Portuguese and Irish, but also Spanish, Italian and French government bonds spiking to the highest levels since the introduction of the euro. With Jean-Claude Trichet's term as ECB president up, investors are unsure how incoming Bank President, Mario Draghi will tackle the many issues facing the region. Rising borrowing costs and cooling inflation combined with slowing growth and high unemployment could prompt the ECB to pursue some form of more aggressive monetary policy easing or an increase in government purchases to bring down borrowing costs in member nations at the least. However, with the Fed in focus, the common currency will remain range bound, or at least until more Greek rumors arise.
Sterling is slightly stronger this morning, but remains well entrenched near the key 1.60 barrier. The resurgence in risk appetite has helped the pound as investors feel more confident that Greece will not hold a public referendum on their bailout package, and that the Fed may be close to providing more stimulus to the US economy. Better than expected British PMI construction data has also boosted the GBP with the index registering 53.9 versus 50.0.
The JPY continued to grind lower against its major counterparts, regaining lost ground following the BoJ's aggressive intervention earlier this week. The yen broke below the 78 barrier against the USD this morning and a BoJ member warned investors that we could see the yen, regarded as a relatively safe currency, rise even further should investors' risk aversion intensify over a deepening European crisis. Nevertheless, Prime Minister Azumi remains adamant that he will continue to intervene in the currency market until he is satisfied, giving JPY-bulls pause when considering speculative yen positions.
The Commodity Currencies are all higher this morning on the resurgence in risk appetite. Raw good prices are also well in the black with oil rising to $93.50/bbl, gold rose to $1743/bbl, and copper spiking by more than 3% to $360.80/lb. The CAD gained by more than a percent this morning on the rising price of oil, Canada's main export, and on the strong private payrolls report out of the US, Canada's main trading partner. The AUD and NZD both pushed higher as investors shifted capital into higher yielding assets. Despite the RBA's recent dovish bias, Australian interest rates remain the highest in the G10. With its interest returns and relatively strong economic fundamentals, the AUD remains well supported above parity with the USD. The ZAR was the biggest winner overnight, gaining nearly 2% against the USD on surging optimism that the Eurozone's debt deal for Greece will precede as planned. Emerging market assets also spiked higher on speculation that China may ease monetary policy as inflation moderates in the world's second largest economy.
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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.