v US CPI drops to 3.5% YoY, giving the Fed increased room to ratchet up stimulus should the economy slow in 2012;
v Eurozone bond yields remain unsustainably high as the new Italian and Greek governments face significant hurdles;
v The Commodity Currencies are largely weaker even as the price of oil gains to its highest level since early June.
The US Dollar consolidated towards the top of its recent ranges overnight as concerns over Eurozone debt continue to dominate global financial markets. Surging yields on Eurozone debt combined with renewed fears that global economy is headed back into recession, the dollar's role as a safe-haven has provided support. However, weaker-than-expected inflation data out of the US has prompted investors to pare some of their long dollar positions. CPI contracted by 0.8% on a month over month basis, bringing the annualized number down to 3.5% from 3.9% in the previous reading. However, with US monetary policy having remained largely unchanged since the end of QE2 this past summer, the drop in prices reflects waning demand as households struggle to make ends meet. While the Fed has not yet hinted at a third round of quantitative easing, most suspect that the reticence has been due to persistently high inflation. With prices coming back into check, the central bank has increasing room to introduce another round of stimulus should the economy stumble in 2012. However, in positive news, industrial production picked up in October, growing by 0.7% versus a 0.1% contraction in the previous month. Moreover, a report showed an increasing net purchase of US equities, highlighting the fact that the US has not yet lost its appeal as a relatively safe investment.
The EUR remains under pressure this morning as the political developments in Italy and Greece remain more tumultuous than most had hoped for. Mario Monti was officially sworn in as the prime minister of Italy this morning, and is expected to present his government later today, but faces stiff opposition. Meanwhile, new Greek PM Papademos is already facing a crucial confidence vote over the sharp austerity measures the country must enact in exchange for more EU/IMF bailout funds. The common currency has also come under pressure as yields on government debt in EU members from Italy to France have surged over the past week, and regional banks have been stung by the tightening credit market. For instance, Italy's largest bank, UniCredit, approached the ECB overnight, asking officials to broaden the types of assets that they accept as collateral for short-term loans. The ECB has been rumored to have stepped up its purchasing of sovereign debt over the past week, with particular attention paid to Italy. Nevertheless, yields on the Italian 10-Yr bond remain at unsustainably high levels, well above 7%.
Sterling continued its slow grind lower against the USD on the worsening outlook for the British economy, but with its decline softened by increased demand for Gilts. A report from the BoE released overnight said that Britain faces a markedly weaker outlook for economic growth, prompting investors to increase bets that the Bank may soon introduce fresh economic stimulus. BoE Governor Mervyn King told reporters that economic growth will likely be broadly flat in the first half of 2012 as demand for British goods is hit hard by the economic crisis in the Eurozone. Meanwhile, UK unemployment unexpectedly gained to 8.3% from 8.1% in the previous reading, and joblessness among young people rose above one million for the first time since 1992. However, the worsening situation in the Eurozone has pushed the yield on Bitish government bonds to an all-time low as demand for their relative safety surges.
The JPY is flat this morning as stocks recover from an early selloff. The yen's ranges have been increasingly narrow as investors are apparently unwilling to take large positions on either side of the key 77.00 barrier. Nevertheless, the yen remains an investor favorite as increased volatility in global financial markets encourages investors to seek its relative safety.
The Commodity Currencies are mixed this morning with the AUD and NZD both declining while the CAD is marginally higher. Raw goods are mostly lower with gold falling to $1774/oz and copper dropping to $348/lb, but oil surged above $100/bbl after pipeline operator Enbridge said it would be opening an outlet for crude from Oklahoma, a glut that has weighed on the price of WTI versus other oils in the past months. The CAD has been well supported this morning by the rise in the price of oil, Canada's main export, and on the relatively encouraging data out of the US. Meanwhile, the AUD and NZD both remain under pressure as the ongoing Eurozone debt crisis saps demand for the higher yielding, but riskier currencies. The South Pacific currencies also came under pressure after officials from China, their primary trading partner, commented that they will fine tune monetary policy, but will remain prudent on inflation. Tighter policy in China has weighed on economic growth, and thus demand for imported goods from Australia and New Zealand.
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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.