The US Dollar has recouped overnight losses against most major currencies this morning as US stocks give up much of yesterday's late-day surge. The FOMC surprised the market yesterday by specifying the outlook for rates through next year. The Fed has previously implied a time frame of 3 to 6 months, and futures markets had been pricing in a 0.25% interest rate hike in Q1 '12 as recently as last week. However, Chairman Bernanke pledged to maintain exceptionally low rates "at least through mid-2013." The Fed also discussed the "range of policy tools available" while emphasizing that it is "prepared to employ these tools as appropriate." The statements are eerily similar to those one year ago when Bernanke hinted at QE2 after the August '10 FOMC announcement. The Fed chief will speak later this month in Jackson Hole, and his words will be closely monitored for any hints of additional monetary easing. As such, the dollar has remained largely range-bound overnight against most of its major counterparts, with the overall direction of the market tracking investor sentiment. Wholesale inventory data released this morning showed that stockpiles grew in June at the slowest pace in seven months as distributors kept inventories in line with slowing sales. With stocks falling deep into the red, the dollar will remain relatively well supported in its role as a relatively safe currency, but gains may be unsustainable with such an uncertain outlook for the US economy.
The EUR has pushed back towards pre-Fed announcement levels this morning as investors shift capital out of relatively risky assets. Yesterday afternoon, the Fed affirmed that US interest rates will remain near 0% for the remainder of the year and at least until the middle of 2013. Meanwhile, the ECB remains focused on rising inflationary pressures, and its 1.5% yield advantage over the USD will likely continue to provide downside support. However, the Eurozone faces a tough road ahead as regional leaders have yet to put together a cohesive plan to stop the debt contagion from spreading from the periphery to the core nations. For instance, credit default swaps for France, the second largest Eurozone economy, surged to record highs on fears that its two largest banks will need assistance should the debt struggles spread further. Nevertheless, the EUR's yield has kept it locked within its more long-term range between 1.40 and 1.45 against the USD.
Sterling tumbled overnight as riots rocked the UK for a fourth straight night. Initially prompted by a questionable police operation that resulted in the death of a North London man already in custody, the riots have spread beyond the nation's capitol, embraced by underemployed youths feeling the pinch of British austerity measures. With the government's fiscal consolidation program barely underway, investors are fearful that the riots may be the start of a troubling trend. An inflation report due from the BoE later this afternoon is also expected to show that the UK economy is slowing. With no scope for higher interest rates in the short or long term, the pound will struggle to post any significant gains. However, it will remain supported on the downside as an alternative to the troubled EUR.
The JPY extended its recent gains overnight, reaching a fresh post WWII high after the US Fed was unable to assuage investor fears that the global economy is slowing. However, rhetoric from Japanese officials has intensified over the past several days with Finance Minister Noda telling parliament this morning that one-sided moves in the yen will hurt the nation's growth. The CHF, the other defacto "safe-haven," currency fell by more than a percent from yesterday's all-time highs after the SNB signaled it will take action to weaken the franc. However, officials remain reticent to begin a systemic plan of market intervention like the one employed through 2009 to little success. The central bank has thus far accumulated a loss in excess of $36 billion in the past year and a half on its foreign currency holdings. However, with a 12% gain against the USD in just the past month, investors are increasing bets that the SNB will be forced to intervene sooner rather than later.
The Commodity Currencies have all come under immense pressure this morning after yesterday's late-day rally. Commodity prices are mixed with oil up to $80.25/bbl, gold surging to $1777/oz, but with copper falling to $394/lb. The CAD was hard hit, tumbling by more than a percent and a half against the dollar on the overall lower price of oil, and also the worsening outlook for the US economy, the main destination for Canadian goods. The AUD has been one of the most volatile currencies over the past three days, trading in a 6% range. The Aussie is pushing back towards the lower end of its ranges as global stocks sell off, but significant resistance remains at parity, a key psychological barrier. The NZD, MXN and ZAR have all also tumbled in early trade from the renewed wave of risk aversion.
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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..