v US Q4 '11 GDP expanded at a 3% pace, faster than previously thought, and personal consumption jumped by 2.1%;
v ECB extended a second round of 3-Yr loans this morning to more than 800 European banks amounting to EUR 530B; Ireland unexpectedly announced that it will put the region's fiscal pact to a referendum vote;
v Commodity currencies gain to multi-month bests as the US and European data supports a rebound in investor risk appetite.
The USD is evenly mixed this morning as investors take note of the heavily subscribed second round of ECB 3-Yr loans and surprisingly strong economic data out of the US. The ECB operations are providing a general sense of support as global financial markets extend their recent rally with the increase in liquidity greatly reducing funding constraints, at least in the near term. Meanwhile, US Q4 GDP beat expectations at +3%, showing that the economy expanded at a faster pace than originally estimated as business rebuilt inventories in anticipation of increasing consumer demand. A measure of personal consumption also gained by more than expected at +2.1% versus last month's 2% rise while the Chicago PMI jumped to a one-year best reflecting the continued rebound in manufacturing. However, US policymakers remain hesitant to acknowledge that the economy has in fact turned the corner. Fed Chairman Bernanke testified before the House Financial Services Committee this morning. While he mentioned bright spots in the recovery, he reiterated the FOMC's commitment to keep interest rates exceptionally low through 2014 and his continued dissatisfaction with slow progress in the labor market. However, this morning's strong GDP report greatly reduces expectations that the Fed might pursue a third round of quantitative easing in the near term.
The EUR is sharply lower this morning after more than 800 European banks tapped the ECB's second offering of unlimited 3-Yr loans. The central bank lent out nearly EUR 530B, far more than the EUR 189B leant to 529 institutions during the first operation held in December. While the easy access to cheap liquidity will greatly reduce funding concerns in the near term, the fact that so many institutions needed assistance is causing investors to second guess the health of the broader Eurozone economy. Meanwhile, Ireland is set to put the Eurozone's fiscal pact reached at the end of last year to a referendum with Finance Minister Noonan telling reporters that any such measure would essentially be a vote on Ireland's desire to remain within the currency bloc. While the treaty only needs 12 of the 17 Eurozone members to vote yes for it to pass, an Irish parliamentary rejection would certainly weigh on its credibility.
The GBP extended its weekly gains this morning against the USD, breaking above its 200-day moving average for the first time since last October. The pound also gained against the EUR as investors suspect that today's ECB 3-Yr loan offering will prove to be a windfall for the British financial services sector. A report this morning showed that British consumer confidence held at the highest level since last June and mortgage approvals unexpectedly increased. The pound was also helped higher after one of the BoE's more bullish members, Paul Tucker, told reporters that the central bank needs to be ready to withdraw stimulus as the UK economy strengthens.
The JPY is sharply lower this morning, reversing much of its weekly gains against the dollar after the ECB loan operation encouraged a bit of risk taking. A report this morning also suggested that Japanese officials are becoming more complacent with recent yen levels as the Ministry of Finance refrained from selling yen this month. Meanwhile, a separate report showed that Japanese industrial production beat expectations, gaining by 2% in January, and looks set to continue its steady climb higher in the months ahead. However, production remains 2.7% below the pre-earthquake levels from one year ago, and 13.4% below the pre-crisis peak set in February 2008.
The Commodity Currencies are all stronger this morning on the uptick in investor optimism and despite a pullback in raw good prices. Oil pared recent gains, slipping below $106/bbl, gold tumbled 3% to $1734/oz and copper fell to $389/lb. Despite the declines in commodity prices, the CAD gained to its strongest level against the USD since early September as the boost in liquidity fueled risk appetite. The strong GDP report out of the US, Canada's main trading partner, provided further support. Similarly, the MXN is higher this morning as investors expect the strong US data to translate into increased demand for Mexican exports. The AUD extended its weekly gains to a three-week high as Australian retail sales surprised to the upside, prompting investors to pare bets of further interest rate cuts.
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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.