The US Dollar is mixed this morning a day after President Obama signed the debt relief bill into law. The measure gave the Treasury Department breathing room and will cut the deficit by more than $2T over the next decade. While a strong step in the right direction, the bill falls short of what ratings agencies Moody's, Fitch and S&P were looking for. As such, their negative outlook for the US's AAA credit rating remains in place. The deal was a compromise on both sides of the aisle with the Democrats giving up their push for an increase in Federal tax revenues and the Republicans gaining far smaller cuts to government spending than initially sought. It is far from ideal from any perspective, but it does put an end to the so-called "debt crisis" and avoids an imminent default. As such, investors' attention has shifted back towards the larger theme of a slowing global economy. ISM manufacturing disappointed earlier this week as the measure showed the sector that had led the economic recovery through much of 2010 slowing by more than expected. This morning, ISM non-manufacturing also showed a decline, registering 52.7, down from 53.3 in June. The service sector, the largest part of the economy, expanded at the slowest pace since February 2010 as orders and employment cooled. A report from Challenger, Gray & Christmas this morning also showed that firings climbed 59% from 12 months prior, the fastest pace since April 2009. With economic data beginning to show that the US economy is slowing substantially, the USD has been mixed - supported in its role as a "safe-haven" as global financial markets rack up losses, but also weighed upon as investors begin to speculate that the Fed may step in and stimulate the economy through a possible third round of quantitative easing.
The EUR traded in a wide range overnight, but has since pulled back from its recent weekly highs. The common currency initially gained, supported as the primary alternative to the dollar, as fears remain that the US may face a credit downgraded despite the recent debt deal. However, the EUR's upside has been limited ahead of a key ECB meeting tomorrow at which the Bank is unlikely to raise interest rates. Despite persistently high inflation, rising yields on debt in not just the region's periphery economies, but also much larger members like Spain and Italy, the ECB would be placing undue pressure on the already struggling economies. Yields on both Spanish and Italian 10-Yr government bonds are pushing near unsustainably high levels well over 6% compared with 2.3% in Germany. Nevertheless, the EUR will remain supported in the near term as the main USD alternative.
Sterling is higher this morning supported by an unexpectedly positive PMI services report and as investors turn away from both the US and Eurozone. UK services unexpectedly grew at the fastest pace in four months, led by demand at business services and tech companies. A decline had been expected, and as such, the positive reading has translated into a boost for the pound. However, the question is now weather those gains can be sustained in the coming months against the headwinds of austerity in the UK and ongoing sovereign debt issues in major export markets.
The JPY gained yet again this morning, inching back towards its all time highs in the low 76's. Japanese Finance Minister Noda told reporters this morning that the BoJ would aim for "maximum effect" in any intervention to weaken the yen. Investors were not dissuaded from buying the JPY however, after the SNB unsuccessfully acted to weaken the CHF. The franc did initially fall after the Bank surprised investors with a cut in interest rates, but it has since rebounded to within a tenth of a percent of where it was before the move. As long as the US and Eurozone struggle with debt, the safe-haven currencies will remain well supported.
The Commodity Currencies are mixed this morning with the CAD, AUD and NZD all weakening while the higher-yielding ZAR gains. Oil declined to $92/bbl, copper was down to $432/lb, while gold extended its recent gains, reaching a fresh all-time high of $1667/oz. The CAD was led lower by the falling price of oil, Canada's main export, and apparent economic slowdown in the US, Canada's largest trading partner. The AUD also fell after a report showed retail sales unexpectedly falling in Australia for the second straight month, with trend growth falling to just 1.7% Y/Y, the weakest annual rate since records began in 1983. Investor positions have shifted dramatically with the market currently pricing in 0.75% in interest rate cuts over the next 12 months, with over 0.5% of that being added in just the past three days. This is in contrast with both the RBA's official position and the IMF's recommendation who have both indicated this week that additional tightening will likely be required. While the commodity currencies have held up surprisingly well over the past several weeks despite growing uncertainties over US and Eurozone debt, downward pressure will likely increase in the coming days as investors liquidate USD and JPY funded speculative positions.
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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..