The US Dollar is stronger against all of its counterparts other than the JPY this morning as stocks and commodities continue yesterday's mild selloff spurring demand for the dollar's relative safety. The initial excitement over the new governments in Italy and Greece has quickly worn thin as borrowing costs continue to rise in Italy, Spain, Belgium and now France. Meanwhile, producer prices in the US dropped by the most in four months in October as the cost of raw and partially finished goods decreased thus removing some of the pressure for companies to pass on higher prices. Lower prices suggest a slowdown in inflation, which in turn gives the Fed more room to support the economy should activity wane in the coming months. Retail sales data registered better than expected, gaining by 0.5% versus a forecast of 0.3%, but the figure is significantly lower than the 1.1% registered in the previous reading. A gauge of manufacturing in the New York region also registered better than expected at 0.61 versus an expected -2.00, and up from -8.48 in September. However, the generally positive data has not been enough to encourage financial markets higher, and as such, the USD remain well supported in its role as a safe-haven asset.
The EUR shed another percent overnight against the USD, widening its losses from its recent highs to nearly 5%. The current source of worries for the Eurozone are rising borrowing costs in the regions large economies - namely Italy, Spain and France. Italian government bonds with maturities longer than five years are now yielding over 7%, a level that will prove unsustainable in short order, and would drive the government to insolvency in the near term if they remain this high. Incoming Italian PM, Mario Monti, is also facing opposition in approving his new cabinet, a possible foreshadowing of the difficulties the new government will likely face. While Berlusconi was certainly a hindrance to the political process, the new government likely won't have the clear support of the majority that was hoped for. As a reference, the average lifespan of the revolving door of technocratic Italian governments in the 1990's was eight months. With borrowing costs on the rise, and with such continued political and economic uncertainty, investors will be hard pressed to wholeheartedly embrace the EUR in the coming months.
Sterling slipped sharply against the USD as inflation data revealed a continued dismal outlook on the UK economy. While CPI eased slightly from last month, it remains above the key 5% psychological barrier, and the prolonged pressure adds to the view that the country's recovery will struggle as living standards are pinched. Such expectations have fueled speculation that the BoE may pursue a second round of quantitative easing, which would prove negative for the pound as it would involve infusing the market with liquidity to stimulate growth. Although believed to be already priced in, investors still are looking to Wednesday as the BoE releases its quarterly inflation report and outlook for UK growth.
The JPY is higher against all of its major counterparts this morning as spooked investors turn to its appeal as a safe-haven instrument. The yen strengthened past the key 77 barrier against the USD this morning, but investors have grown increasingly jittery with expectations that the BoJ is looming. Japanese officials have been increasingly outspoken over the past several days, and Japanese business leaders are urging them to focus on continuous action on the yen. The BoJ last intervened when the yen broke below the 76 barrier against the USD, and any further movement back towards that level will likely prompt successive rounds of intervention.
The Commodity Currencies are generally lower this morning as risk aversion takes hold of global markets. Raw goods are relatively flat with oil gaining to $98.85/bbl, gold falling to $1776/oz, and copper extending its decline to $349/lb. The CAD fell against the USD as rising Eurozone bond yields exposed the troubles policymakers are facing as a result to the region's debt crisis. Softening the blow was Canada's better than expected domestic data which showed stronger manufacturing sales, reinforcing the expectations for a robust 3rd quarter economic growth. Factory sales jumped 2.6% in the month, beating expectations of a 1.3% gain and reaching its highest level since October of 2008. The AUD and NZD are both lower this morning over the Eurozone concerns, but the selling slowed after the minutes from the last RBA meeting showed that there was a case for keeping interest rates unchanged. The ZAR was the worst performing currency against the USD overnight after RBSA Governor Gill Marcus told reporters that the risk of stagflation is increasing as inflation continues to rise while the domestic recovery remains tepid at best.
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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.