v USD gains as New Year rally loses momentum; US manufacturing gains 1.8% on strong auto and aircraft sales;
v EUR pushes below 1.30 yet again on renewed concern that the Eurozone struggles with debt will result in credit downgrades; region-wide inflation dropped, prompting investors to expect further ECB interest rate cuts and monetary easing policies;
v Commodity Currencies pare recent gains on declining risk appetite, but resilient manufacturing data out of the US and China provides downside support.
The USD is sharply higher this morning against most of its major counterparts as yesterday's New Years rally in stocks and commodities loses momentum. Confidence faded early after the release of a mixed factory orders report. While at +1.8% the measure bested last month's weak -0.2% reading and still fell short of expectations for an expansion to 2.0%. 1.8% does mark the best reading in more than four months, suggesting that manufacturing may again help the economy grow in 2012, but while demand was high for aircrafts and autos, orders for computers, electronics and smaller household items declined. In other news, the minutes from the Fed's last meeting of 2011 announced that going-forward, individual FOMC members will announce their forecasts for monetary policy, inflation, unemployment and economic growth on a quarterly basis. The estimates will remain anonymous, but the increased transparency likely will appease foreign complaints of the influence that the Fed's stance has on global economic activity. However, this is likely not a sign that the Fed's policy is in fact changing, and expectations remain that they will hold to their earlier commitment to keep rates at historically low levels until the middle of 2013. The Presidential race is also taking shape with Mitt Romney narrowly winning the Iowa caucus against the upstart Rick Santorum. While the Republican field will likely thin in the coming weeks, Romney's lead is closely followed by Santorum, Gingrich and Paul.
The EUR pared yesterday's gains, but remains within its recent ranges of 1.5% to either side of the key 1.30 handle. A report released this morning showed that inflation in the Eurozone slowed by more than forecast, prompting investors to increase their bets that the ECB may ease policy further in the coming months after their 0.5% interest rate cuts to end 2011. An auction of German government bonds also attracted less demand than the five-year average for similarly dated securities, suggesting that confidence in even Europe's most stable economy may be waning. In Spain, a newspaper reported that the Spanish government helped the Valencia region make an overdue payment on its debt to Deutsche Bank, highlighting the funding risks that the Eurozone nations face. As such, the EUR has come under renewed pressure with the Eurozone debt crisis again stealing international headlines, and with region-wide economic data cooling significantly.
The GBP is split this morning, gaining to a one-year high against the EUR, but with its rise outdone by flight to the safe-haven USD. The pound's decline against the dollar has however been muted by a number of strong economic releases this morning. British PMI Construction surprised to the upside, with the index gaining to 53.2 versus the expected 51.5. Net consumer credit also expanded, as did mortgage approvals. With the ongoing Eurozone debt crisis, the GBP remains poised for gains against its mainland European counterpart as policymakers' efforts to distance British policy from that of its fellow EU members makes the GBP relatively attractive.
The JPY is flat this morning against the USD, but strengthened by another 1% against the EUR. Strangely, BoJ interventionist rhetoric has cooled as of late, and a report released last week showed that Japanese officials didn't sell any yen in December. However, this appears counterintuitive to their recent stance on the yen's overall direction, and it's unlikely that they would abandon a weak-yen policy after spending billions of dollars in an attempt to reverse its direction. While the USD/JPY exchange rate has been the primary cause for concern, should the yen continue to strengthen against the EUR, it could prompt further rounds of BoJ intervention.
The Commodity Currencies are generally weaker this morning on waning risk appetite and falling raw goods prices. Oil pared some of its recent gains to $102.57/bbl, but remains elevated on increased tensions in the Middle East. Copper is also sharply lower, falling to $344/lb, despite the stronger than expected manufacturing report out of the US as global expectations are clearly skewed towards weaker economic growth and slowed demand in the year ahead. The CAD dropped from a one-week high this morning with declines in equities and commodities sapping demand for higher-yielding assets. Similarly, the AUD is lower despite evidence that US and Chinese manufacturing is weathering the European slowdown. The ZAR was the worst performer against the USD overnight, snapping a four-day winning streak on fear the Eurozone, the main destination for South African exports, is headed back into recession.
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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.