v USD gains on risk aversion; Richmond Fed Index gains to 12 after last month's reading of 3;
v EUR consolidates within its recent ranges as Greek debt talks stall over interest rates to be received on future bond sales;
v JPY drops sharply after BoJ cites yen appreciation as one of the primary causes of the economic slowdown in Japan.
The USD gained against most of its major counterparts overnight as an apparent stall in Greek debt talks prompts increased demand for the dollar's safety. The flight to quality was further supported as stocks and commodities extended yesterday's late-day losses amidst a slew of weaker than expected earnings from Wall Street bellwethers DuPont, Texas Instruments and Verizon. Nevertheless, the dollar's gains have been limited to within its recent broader ranges ahead of a key FOMC meeting set to conclude tomorrow. The Fed is expected to release its first ever forward-looking forecast for the Fed funds rate, which will provide greater insight into the blanket outlook of mid-2013 that has been annunciated since late last summer. Investors will also surely take note of President Obama's 4th State of the Union address this evening. While there are a number of polarizing topics heading into the 2012 election cycle, the economy will likely remain front and center with the President expected to touch on income inequality, debt, taxes and ongoing weakness in the labor market. Meanwhile, the Richmond Fed Index gained to 12 after last month's far weaker reading of 3 and better than the forecast of 6.
The EUR pushed back below the key 1.30 barrier against the USD as Greek debt talks stalled. Regional finance ministers have made significant progress over the past few weeks in devising a plan to restructure Greece's mounting debt load and pass on significant haircuts to private sector debt holders. However, the EU has stipulated that in order for Greece to meet its long-term funding goals, the interest rate on new bonds must be clearly below 4%, but the terms currently being discussed imply interest rates beyond that 4% threshold as far out as 2020. Meanwhile, progress has been made on the fiscal front with a finalized treaty establishing the European Stability Mechanism (ESM) to be implemented in July, well ahead of schedule.
The GBP is one of the few currencies higher against the USD this morning as strength against the EUR permeates across the sterling crosses. However, the pound largely remains within its recent ranges ahead of the release of minutes from the BoE's policy meeting held earlier this month. With the Bank's current asset purchase program set to expire in February, investors will pay particularly close attention to the minutes to glean any signs of further easing in the months ahead. With inflationary pressures easing and the British economy continuing to underperform, another round of quantitative easing seems all but certain.
The JPY is sharply lower this morning on growing expectations that the BoJ could soon act to stem yen strength. At a meeting this morning, the BoJ left interest rates at 0.1% and maintained the size of their asset purchase program, having little impact on global currency markets. However, the BoJ downgraded their assessment of the Japanese economy for the third consecutive meeting, the worst such trend since the beginning of the financial crisis in late 2008. The Bank stated that economic activity is more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen. This has led investors to expect the worst as the Bank may act to alter the one factor they can at least have an impact on, the strength of the yen. However, with today's knee-jerk sell off just on the comments alone any impending yen-selling operation will likely be forestalled, at least for the time being.
The Commodity Currencies are generally lower this morning on the pullback in risk appetite and lower commodity prices. Oil slipped to $98/bbl, gold fell to $1671/oz and copper was down to $379/lb. The CAD pushed lower within its recent ranges on the falling price of oil, Canada's main export, and as Canadian Retail Sales slowed to just 0.3% versus last month's 0.9% gain. The AUD dropped by 0.5% against the USD ahead of a CPI report due later today that is expected to show a continued easing of price pressures. This is leading investors to price in further rate cuts from the RBA as the central bank protects against a slowing economy.
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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.