The US Dollar is mixed this morning, with the main move coming against the "safe-haven" CHF. The USD was helped early on by recovering stock and commodity markets, and by better than expected labor market data. Weekly jobless claims dropped to 395K versus the 405K expected, and continuing claims dropped to the lowest level in more than four months. The positive news has given a boost to stocks this morning after the DJIA plummeted by more than 500pts yesterday for the second time in three days. However, the main mover in currency markets overnight was a surprising announcement from the SNB that Switzerland may consider pegging the CHF to the EUR to stem recent gains. The CHF had gained more than 32% against the USD over the past twelve months, but today's announcement has seen that gain cut by more than 5% in a matter of hours. As one of the primary "safe-haven" assets, the reversal of capital flows has had ripple effects against all of the major crosses, with riskier currencies gaining by the most.
The EUR is relatively flat this morning after settling into an increasingly narrow range between 1.41 and 1.44. The common currency has, however, moved sharply higher against the CHF after the SNB announced a peg to the EUR is being considered. The EUR has lost more than 30% against the franc over the past year, but this morning's announcement has seen this week's rebound extend by more than 8%. The EUR has languished against the franc this year as debt contagion in the region's periphery threatens to move into the core economies. Worries have most recently hit France, the region's second largest economy, as rumors arose that S&P was considering a downgrade of the country's AAA rating. The spread between yields on French and German government bonds spiked to an all-time high yesterday, and investors feared that France's two largest banks may need government assistance. The EUR will remain highly volatile against its European counterparts, but against the dollar, further consolidation within its recent ranges is likely.
Sterling is higher this morning after the British Chancellor of the Exchequer reaffirmed the government's commitment to fiscal consolidation and spending cuts. Deputy PM Nick Clegg also told reporters this morning that the government won't "water down" austerity measures despite this week's riots in London and neighboring cities. With relative discipline on hand, British assets, including the GBP, have benefitted as investors look for alternatives to the EUR and USD. The GBP has also spiked against the CHF this morning, gaining by more than 5.5%.
The JPY is relatively flat with little major economic news out of Japan. A report released yesterday did, however, show that orders for Japanese machines did rise considerably in the past month, registering a 7.7% gain versus the 1.7% gain expected. This brings the annualized pace of expansion up to 17.9% from 10.5% in the previous month.
The CHF is sharply lower this morning, falling by more than 4.5% against all 16 of its most actively traded counterparts, after SNB officials suggested that a peg to the EUR is being considered. The biggest moves have come against the higher-yielding, but riskier currencies such as the SEK, MXN, NOK and AUD. The franc has also weakened by more than 5% against the USD, EUR and GBP. With global economic fundamentals deteriorating throughout the first half of 2011, the franc had been the breakout story of the year, gaining by more than 25% against all of its major peers over the past 12 months. However, the soaring currency has stung the Swiss economy with its exports becoming ridiculously expensive and increasingly less competitive. The Swiss banking system has also been hit hard by an increasing number of loan defaults by Central Europeans that took out CHF denominated loans when the currency was much weaker to benefit from the lower interest rates. However, with their loan payments now 25+% more expensive than one year ago, residents in Hungary, Poland and the Czech Republic for instance are struggling to meet their obligations. While the peg to the EUR could make sense in the near term as the SNB is nearly out of options after slashing interest rates to 0% earlier this month, the implementation of such a system may prove extremely difficult. It would not likely dissuade "safe-haven" capital inflows, thus obligating the SNB to intervene on a consistent basis. The Bank has already realized a massive loss on its FX holdings from its last unsuccessful attempt at FX market intervention, and adding to a losing position will likely prove unpopular and difficult to sustain. However, with such uncertainty, volatility in the CHF will likely remain high as we head into the end of the week.
The Commodity Currencies are higher across the board as stocks and commodities stage a relief rally after yesterday's steep sell off. Oil gained to $83.75/bbl, copper was back over $400/lb, and consumables were up across the board. The AUD gained, pushed higher largely by the reversal of capital flows into the "safe-haven" CHF. However, gains were tempered by a report showing Australian unemployment unexpectedly picking up to 5.1% from 4.9% last month. With demand for Australian goods cooling as the global economy slows, industry in the South Pacific nation has been hard hit by the prohibitively high AUD. The CAD is higher this morning, supported by the recovering price of oil, the nation's main export, and a better-than-expected labor market report in the US, Canada's main trading partner. The MXN and ZAR are also both modestly higher as investors cautiously reenter higher yielding, but riskier 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..