The US Dollar is mixed this morning as immediate funding worries for the Eurozone's new flashpoint, Italy, ease for the time being. The dollar pulled back from a one-month high against the EUR after an auction of Italian bonds drew more than sufficient demand, and Greece installed a new PM. With the immediate worries of the Eurozone descending into political turmoil, and insolvency abating, investors have been modestly encouraged to reenter riskier positions, albeit apprehensively. Meanwhile, US weekly jobless claims pushed lower, registering 390K from last week's 400K, and continuing claims dropped to 3615K from 3707K in the previous reading. The US trade deficit also unexpectedly shrunk as exports surged to a record level. The smaller trade bill will likely add to Q3 growth, and an upward revision next month is not unlikely. Import prices unexpectedly contracted by 0.6%, reflecting lower costs for fuel and food suggesting that inflation will ease over the coming months, fitting with the Fed's objective of price stability. However, with investors not yet willing to assume riskier positions en masse, the dollar will remain well supported within its recent ranges heading into the long weekend as the default safe-haven currency.
The EUR is stronger against most of it major counterparts this morning as the worries over Italy and Greece temporarily ease. Despite rumors of stalled talks, the Greek parliament named Lucas Papademos, a former ECB VP, interim Prime Minister. Papademos told reporters that the chief task of the caretaker government was to implement the controversial EU bailout package that proved to be the downfall for ousted PM Papandreou. The country is expected to hold fresh public elections in February. Meanwhile, an Italian bond auction attracted double the demand necessary to cover the securities on auction, suggesting that investors have not lost confidence in the Italian government just yet. As such, the cost of Italian debt eased as well, with the yield curve short of the 30-Yr bond falling back below 7%. However, 6.95% on a 10-Yr note still remains unsustainably high and runs the risk of forcing the Italian government to seek financial assistance from the ECB or IMF, a prospect that either body would struggle to afford. Nevertheless, until more concrete developments unfold, the EUR will likely remain within its recent ranges.
Sterling is lower this morning against most of its major counterparts after the BoE kept its benchmark interest rate steady at 0.5%. The BoE also kept its bond-purchase program on hold after increasing its total size to 275B GBP at last month's meeting. The pound came under pressure against its mainland EU counterpart after the successful Italian bond auction sapped demand for the relative safety of British government bonds. Nevertheless, the pound has gained nearly 1% against its G10 counterparts this week, making it the third-best performer behind the USD and JPY.
The JPY continues to appreciate against most of its peers this morning despite the improved news out of the Eurozone and US. However, as the yen pushes higher, the risk of another round of central bank intervention increases exponentially. Japanese exporters have become increasingly outspoken about the effects of the strong yen on their profits, and the impact of the strong currency can be seen in shifting production strategies. Major Japanese corporations have boosted foreign output considerably over the past several years with Toyota's overseas production growing from 49% to 58% and Panasonic's jumping from 43% to 57%. Meanwhile, the number of Japanese factories has steadily declined, dropping by 40% from the peak, and tax revenue is down more than 20% from a decade ago as jobs move overseas. Japanese authorities are fearful that once outsourced, lost manufacturing jobs will be impossible to reclaim. Nevertheless, the yen remains a proxy for risk appetite, and as such will remain well supported in the near term.
The Commodity Currencies are mixed this morning with the CAD and ZAR gaining, while the AUD and NZD are lower. Raw goods are similarly mixed with oil rising to $97/bbl, while gold and copper both fell to $1747/oz and $334/lb respectively. The CAD is higher this morning as the price of oil continues to push towards the key $100/bbl barrier. Despite economic worries in the US and Eurozone, the price of crude continues to climb on growing tensions in the Middle East and after a report showed that US inventories unexpectedly fell. Meanwhile, the AUD and NZD declined as investor risk appetite remained weak, but their falls were shallower than other high-yielding currencies as investors increasingly turn to Australian and New Zealand government bonds as relatively safe assets. The ZAR is higher this morning as the positive news out of the Eurozone outweighed the RBSA decision to keet interest rates on hold at 5.5% as inflation in Africa's largest economy moderates and the economy struggles to grow.
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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.