v USD weakens as risk appetite returns as stocks and commodities rise; US inventories gain by less than forecast reflecting increased consumer demand;
v EUR pushed back to the higher end of its recent ranges as European leaders make progress towards backstopping the region's struggling economies;
v Commodity Currencies were the best performers overnight, gaining on the rising raw good prices and on increased odds that China will ease monetary policy further to support economic growth.
The USD is lower against nearly all of its major counterparts this morning as stocks and commodities post strong gains. The recovery in risk sentiment has benefitted the higher-yielding cyclical currencies, and alleviated the pressure on the embattled EUR, at least for the time being. The mounting confidence comes as investors begin to expect more monetary easing from China with Chinese GDP having slowed to 8.5%. Reports that German Chancellor Merkel will be meeting with IMF Director Lagarde have also encouraged investors that European officials are taking the necessary steps to backstop the region's struggling economies. The surge in confidence has been further supported by US data released this morning showing that wholesale inventories gained 0.1% over last month. The expansion was less than forecast, suggesting that distributors are struggling to keep up with demand. Smaller inventories may have also led producers to boost output in Q4 '11, in turn adding to GDP. An index of small business optimism also gained this morning, registering 93.8, the highest level since last March.
The EUR is relatively flat this morning after posting steady gains against the USD late yesterday afternoon. Sovereign debt ratings are again in question with Fitch Investor Services affirming Germany's AAA rating and stating that France is unlikely to lose their top mark in the near term. However, the concern is that more than half of the debt scheduled to be issued this year within the region will originate from countries other than Germany and France; countries that are still very much at risk of a downgrade. Nevertheless, it appears that European officials are making headway on developing a plan to backstop the region's struggling economies. German Chancellor Merkel will meet with IMF Director Lagarde and French President Sarkozy later this week and next in the run up to an EU policy summit scheduled for January 30th. While consensus is surely a step in the right direction, the budget cuts and fiscal consolidation that will need to be implemented throughout the Union is no small task. Moreover, a report this morning showed that futures traders are pricing in the possibility of at least one Eurozone member leaving the currency bloc by the end of 2012, 2013 and 2014 with a 31%, 49% and 59% probability respectively.
The GBP is stronger today against both the USD and EUR despite optimism that Eurozone policymakers are nearing a solution to the region's debt crisis. Demand for British government bonds, the safest of assets, has dropped as of late, pushing yields higher, but at 2.06% on the 10-yr, demand clearly remains robust.
The JPY consolidated in its recent ranges overnight against both the USD and EUR while falling against the higher-yielding currencies like the AUD and CAD. The easing flight to safety is weighing on the yen as is increased chatter from government officials about their desire for a weaker yen. Nevertheless, with the persistent concerns over global economic growth and European debt, the trend for a stronger yen will be hard to break.
The Commodity Currencies are generally higher this morning as rising raw good prices and equities encourage investors to seek higher yielding assets. Oil gained to $102.75/bbl on growing tensions in the Middle East, gold was up to $1638/oz and copper rose to $351/lb. The CAD extended its gains against the USD for a second straight day on the rising price of oil, Canada's main export, and on the growing signs of demand in the US, Canada's primary trading partner. The AUD is also sharply higher this morning on increased expectations that China will ease monetary policy further as slowing inflation gives them room to soften the blow of a weakening economy. As Australia's main export market, any measures to support the Chinese economy are supportive of the AUD. The news out of the world's second largest economy has also added support to emerging market currencies such as the ZAR and MXN.
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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.