The US Dollar is mixed this morning after trading through a particularly volatile overnight session as the European debt crisis rolls on. Early this morning, the European Central Bank surprised international financial markets with a 0.25% interest rate cut, bringing their benchmark rate down to 1.25%. Meanwhile, a closed door conversation between Greek, French and German leaders apparently ended with policymakers still at odds with one another. Domestically, investors were disappointed yesterday by the Fed's inaction and a downgrading of the central bank's growth expectations for the struggling US economy. In a noteworthy turn of events, the three FOMC members that had dissented from the two previous votes on grounds that they did not support the additional policy easing measures, voted with Chairman Bernanke today. However, Charles Evans, the President of the Chicago Fed and considered the most dovish member of the committee, voted against the majority suggesting that there are no plans for QE3 on the table. Nevertheless, the selloff in risk assets has moderated, and most major currencies remain within the ranges that have persisted for much of the fall. Investors have also been encouraged by relatively strong economic data released this morning with factory orders rising by 0.3% versus an expected contraction of 0.2% and weekly jobless claims falling to 397K, the second reading below the key 400K barrier since April.
The EUR began the day with a volatile drop lower followed by a spike higher after the ECB unexpectedly cut interest rates by a quarter percent. In a statement move by incoming ECB President Mario Draghi, the cut has been well received by financial markets worldwide with the Eurozone economies expected to slow sharply in the coming months. However, with inflation remaining well above the ECB's goal of 2%, it remains to be seen how proactive the Bank can be in the coming months. Markets are also looking to Draghi for signs that the new ECB chief is willing to intervene more forcefully in bond markets to wall in Greece's so called debt contagion. He did however quash any hopes of direct bailouts for struggling Eurozone nations. What makes you think that becoming the lender of last resort for government is what you need to keep the Euro region together? Draghi told reporters. Meanwhile, the situation in Greece only becomes further embroiled with PM Papandreou now threatening to quit with a temporary caretaker government set to take over until elections can be held. However, rumors this morning suggest that the Greek's are taking the referendum off the table, at least for the time being. However, with clear popular support, the measure may not be dead just yet. Yesterday afternoon, French President Sarkozy told reporters after a closed door session that no bailout funds would be released until after the referendum vote and that should Greece hold the vote, it would be a choice on staying in the Eurozone. If they don't accept the bailout, they will no longer be welcome in the currency bloc.
Sterling is marginally higher this morning against both the USD and EUR after the surprise ECB rate cut. The pound has been helped higher as an alternative to the EUR and also on the modest rebound in risk appetite. However, despite recent encouraging economic data, the British economy remains under pressure. PMI services data released this morning fell by more than expected, dropping to 51.3 from 52.9. in the previous month. A separate report showed that manufacturing shrank the most in 28 months in October, pointing to weakness in the final quarter of the year.
The JPY consolidated within its tight range against the USD overnight, but continues to appreciate against the EUR. The yen has remained relatively well entrenched near the 78 level against the dollar for three straight trading sessions after the BoJ's aggressive intervention earlier this week. However, the initial push higher against the EUR has all but reversed over the past three days as the Greek debt crisis appears to be coming to a head, spurring demand for the yen's safety.
The Commodity Currencies are mostly flat this morning while the ZAR enjoyed a spike higher. Raw goods are mixed with oil rising to $93.40/bbl, gold gaining to $1759/oz, but with copper falling back to $353/lb. The CAD pared recent losses on the buoyant price of oil, the nation's main export, and on the better-than-expected labor market numbers out of the US, Canada's largest trading partner. The loonie was also helped higher by the ECB surprise rate cut encouraging risk assumption. Similarly, the relatively high yielding AUD and NZD remain well entrenched within their recent ranges. Meanwhile, the ZAR jumped higher as investors hope that the ECB cut will help support the struggling EU economies, the main destination for South African exports.
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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.