The US Dollar is stronger against all of its G10 counterparts this morning as the risk-off trade gains momentum. Despite an initially celebrated resignation pledge of embattled Italian Prime Minister Berlusconi, stocks and commodities are sharply lower this morning as the borrowing costs in the Eurozone's struggling nations spiked higher. As the third largest debt market in the world, the health of the Italian financial system has far greater implications for the broader global economy than that of Greece, Ireland or Portugal. With little major economic data to persuade investors otherwise, the market has turned to the safe-haven USD as equities and commodities both sink deep into the red. However, one bright spot this morning was a wholesale inventories report that showed stockpiles unexpectedly shrinking for the first time since 2009 while sales increased, meaning that inventories and demand are becoming more closely aligned. In the immediate term, the USD will remain well supported against most of its major counterparts, but political change in Europe will likely be for the best in the longer term, thus making the EUR's current relatively low levels attractive.
The EUR is sharply lower this morning as the resignation of Italian PM Berlusconi threatens to further unsettle the 3rd largest Eurozone economy. A key parliamentary budget vote yesterday showed Berlusconi's mandate quickly eroding, and as such the Italian leader agreed to resign once new austerity measures are approved by the end of next week. The market was initially relieved to see him go, but Italian government bonds surged, with the yield curve above 7% even on 2-Yr notes. Austerity measures aside, such high borrowing costs will make the Italian government insolvent in short order and investors are fearful that even the newly expanded EFSF will not be able afford an Italian bailout. It is estimated that at today's higher rates, the rolling over of expiring Italian bonds will cost the government at least an additional 30B EUR, undoing half of the 60B in budget cuts. Meanwhile, the formation of an interim Greek government dragged into a third day as talks between opposition parties stalled over EU demands for written commitments.
Sterling is weaker against the USD this morning, but stronger against the EUR as Eurozone woes weigh on investors' risk appetite. The pound's decline has been less steep than that of the EUR as demand for the relative safety of British government bonds provides support. However, the GBP continues to fight an uphill battle as the British economy lags. UK trade balance numbers released overnight showed the deficit widening to record levels as imports surged nearly 4% and exports all but dried up.
The JPY continues to grind higher against the USD and EUR on resurgent risk aversion. As the shock of last week's BoJ intervention abates, demand for the safe-haven yen continues to provide significant support. It appears that investors had positioned themselves for a more proactive BoJ following the aggressive intervention, but the USD/JPY rate will likely have to drift back toward the bottom of its recent ranges, near 75.35, before they again involve themselves. In the meantime, with the market squarely focused on the Eurozone, the yen will remain a proxy for market risk.
The Commodity Currencies are all sharply lower this morning on reduced risk appetite and on the falling price of raw goods. Oil was relatively flat at $96/bbl, gold was back under $1800/oz, and copper tumbled to $344/lb. The CAD is lower for the first time in three days despite the surprisingly stable price of oil, Canada's main export. The AUD and NZD are also both lower this morning on the reduced appetite for higher-yielding, but riskier currencies a day ahead of a report that is expected to show Australian unemployment claims rising in October. The ZAR was the worst performer overnight, dropping more than 2% against the USD, hit hard by the crumbling confidence in the Eurozone and as Moody's Investor Services placed South Africa's credit rating on watch for a downgrade.
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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.