The US Dollar is mixed this morning as investors weigh falling equities and commodities against the continued debt ceiling saga unraveling on Capitol Hill. Divergent themes have led the dollar in opposing directions against its major counterpart, with it paring some of its recent losses against the EUR and GBP for instance while extending its decline against the higher-yielding AUD and safe-haven CHF. US durable goods orders were released this morning far worse than expected, registering a decline of 2.1% versus last month's gain of 1.9%. The data is a foreboding sign for the already struggling economic recovery in the US. Manufacturers are facing a slowdown in consumer spending just as supply chain shortages from the natural disasters in Japan early this year begin to ease. With production set to continue cooling, companies may cut back on hiring, which could further temper household demand. Meanwhile, an imminent vote on Republican Speaker of the House, John Boehner's, debt plan was postponed to tomorrow at the earliest, meaning that the Speaker does not have the votes necessary to pass the plan. This isn't a good sign as we approach the August 2nd deadline to raise the ceiling or else face a possible credit rating downgrade. While data in the US continues to disappoint, and Congress is unable to agree on a plan to raise the debt ceiling and cut the nation's massive deficit, USD volatility will remain high with any significant gains likely limited.
The EUR has traded through a particularly volatile overnight session. The common currency has pared most of its weekly gains this morning however, after bearish commentary from Germany's Finance Minister. Schaeuble told reporters this morning that Germany opposes a "blank check" for the Eurozone rescue fund to purchase bonds in the secondary market. As the largest economy in the Eurozone, Germany's willingness to support the region's periphery economies is paramount to their survival under the current circumstances. Investors have long feared that German taxpayers will grow weary of bailing out their less economically successful neighbors, and as such, the EUR has come off of its recent highs. While trade will remain volatile, the EUR will likely remain locked into its recent ranges as demand as the primary alternative to the USD will provide support and the region's own struggles with debt will limit any significant upside potential.
The GBP is also lower against the USD this morning after the streak of disappointing British economic data continued. British factory orders fell by more than estimated with the CBI index tumbling to -10 from +1 in the previous month. Moreover, manufacturers' optimism plunged to the lowest level in more than two years. The disappointing data highlights the case for keeping interest rates low for the foreseeable future and possibly pursuing a second round of quantitative easing. In the near term, the pound's downside potential is limited by its role as an alternative to both the USD and EUR, but any gains will be difficult to sustain with such negative economic data.
The JPY remains near the best levels since the post-quake spike back in March of this year as investors seek its relative safety. With the US inching dangerously close to a credit rating downgrade with no viable plan to raise the debt ceiling and reduce the nation's massive deficit, and with Europe still struggling to contain a debt contagion from spreading past the periphery economies, the yen has garnered significant investor demand. However, facing their own economic struggles after the devastating natural disasters earlier this year, the last thing Japanese officials want is a stronger currency. As such, the BoJ is reportedly evaluating all options for slowing yen appreciation, but any unilateral actions will likely be ineffective, especially with the increase in capital flows as investors exit USD and EUR positions.
The Commodity Currencies are mixed this morning, with the CAD and MXN falling while the AUD and NZD both continue to gain. The CAD has come under pressure this morning as the price of oil, Canada's primary export, fell, and as the US economy, the main destination for Canadian goods, slows. Similarly, the MXN has come under pressure due to the Mexican economy's close correlation with the US economy. On the other end of the spectrum, the AUD and NZD have both extended their gains to reach new all-time highs against the USD as investors are increasingly turning to the South Pacific currencies as viable alternatives to the USD and EUR. The AUD also gained as CPI data gained by more than forecast, registering 3.6% on an annualized basis, up from 3.3% in the previous reading. The bullish data has prompted investors to increase bets that the RBA will have an increasingly hawkish stance through the remainder of the year; a sharp change from just one week ago when a majority of investors were expecting the Bank to cut rates later this year as the economy slows.
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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..