The US dollar remains within its recent ranges against most major currencies this morning as inflation data registered in line with expectations. The producer price index reported a 0.8% gain month over month, meeting expectations, but falling short of last month 1.1% rise. On an annual basis, PPI has gained 3.6%, but only 1.6% with food and energy excluded. With consumer price data due tomorrow expected to show only modest growth of 0.9% year over year, there is little pressure on the Fed to consider a rate hike in the immediate future. Modest, but steady, gains in prices will allow the Fed to maintain its ultra-accommodative monetary policy and encourage economic growth. Housing starts beat expectations this morning, registering 596k, versus 539k expected, and showing a 14.6% gain from last month. Investors will also take note of the minutes from the Fed's last FOMC meeting, due out later this morning. While no major change in tone is expected, any update on QE2 and whether policymakers are considering cutting the program short could provide direction for the dollar.
With Egypt's long-standing President now unseated, a wave of pro-democratic demonstrations has spread across the Middle East. Demonstrations turned deadly in Iran yesterday when protestors pitched street battles with military police, and Iranian officials called for the execution of activists blamed with inciting the violence. Protestors also took to the streets in Bahrain, Saudi Arabia, Lebanon and Libya yesterday, demanding reformed constitutions and free elections. However, with the relatively peaceful Egyptian transition as an example, global markets have generally taken the political unrest in stride with little effect seen on either oil prices or global stocks.
The EUR has rebounded off of yesterday's lows as US inflation data failed to impress. Unlike the US, Eurozone inflation has moved above the ECB's target 2%, causing knee-jerk hawkish commentary from ECB President Trichet last month. With progress made towards finalizing a deal that would expand an EU bailout fund, investors have begun to expect that the ECB will be proactive in combating inflation with higher rates later this year. However, the common currency's upside remains capped by continuing troubles in the periphery economies. Until the expansion of the EFSF is finalized, EUR gains will likely only be temporary.
Sterling slumped this morning as investors pared their bets on tighter policy from the BoE. With UK inflation now exceeding the BoE's target limit of 2% for 14 straight months, investors had begun to consider higher interest rates inevitable. However, BoE Governor, Mervyn King, remains steadfast in his stance that prices will moderate in the near term as the UK government passes through stringent austerity measures while battling slow economic growth. King told reporters that some people are running ahead of themselves in saying that we are pre-announcing, or we're laying the ground, for a rate rise. That decision has not been taken...it may be many quarters before we do anything.
The JPY eased to its weakest levels of 2011 this morning on relatively strong economic data. With global investors generally upbeat about the outlook for the broader global economy, the yen's appeal as a safe-haven instrument has been significantly reduced. Japan is in fact the most indebted industrialized nation (debt as percent of GDP is expected to surpass 200% in 2012), but officials remain confident that Japan's bond market will continue to find sufficient support from domestic sources. More than 90% of the nation's debt is held domestically, and Japan is also the world's second-largest holder of foreign reserves, leaving little room for a collapse in the government debt market in the near term. However, the yen will likely continue to ease as investors feel increasingly upbeat about the pace of the global recovery.
Commodity currencies are generally stronger this morning as the recent modest gains in gold, oil, copper and agricultural commodities provide support. The AUD remains stuck below parity with the USD, but has come off a two-week low after hawkish commentary from the RBA. Australian miners have reported surging profits, and central bank officials yesterday said that a restrictive policy was appropriate as a resources boom boosts incomes - read higher interest rates in the near term. The NZD also gained, coming off levels near its 2011 lows after strong results from the agricultural industry with the price on milk and fruit exports gaining to more than a two-year high. The ZAR was the biggest winner overnight, recovering from its seven-month lows against the USD reached earlier this week after a report showed that South African retail sales surged an annual 8.3%, the fastest pace in more than three years. The RBSA cut rates to a record low of 5.5% last November in an attempt to boost consumer spending, which makes up two-thirds of demand in Africa's largest economy. Stronger retail sales and a pick-up in inflation may give the RBSA reason to not ease further as the economy recovers.
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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.