Union Bank FX Daily 9-20-12 (see attachment)
• USD rallied as economic data increased global growth concerns.
• EUR is lower after PMI data reported lower than expected.
• JPY gains despite the BoJ’s asset purchase program.
USD – The US dollar rallied after weak data from Europe and China spurred global growth worries, driving investors to safer currencies. The euro slid to a one-week low against the dollar and commodity-linked currencies such as the Australian and New Zealand dollars tumbled. Global growth concerns have returned to the surface, weighing on investor confidence and giving a boost to both the dollar and yen. Investors largely ignored today’s data that US manufacturing reported its weakest performing quarter in three years this month and jobless claims held near two-month highs last week. Manufacturing in the Mid-Atlantic region contracted for a fifth straight month in September. The index averaged 51.5 in the third quarter, below the 54.2 registered between April and June, for its worst showing since the third quarter of 2009. At 51.2, the output component was the lowest since September 2009. With output growing at the slowest pace since the recovery began, the manufacturing sector may have acted as the slight drag on the economy’s third quarter. In addition, the US Labor Department showed the four-week moving average for new claims, rose 2,000 to 377,750 - the highest level since June. US businesses have clearly remained reluctant to aggressively boost their workforce amid the soft economy and significant uncertainty surrounding fiscal policy. The dollar index .DXY, which tracks the value of the greenback against a basket of currencies, rose 0.6% to 79.519, the highest since Sept. 13. Global economic weakness and signs of a faltering economy in the US can be contributing factors for investors to buy US denominated bonds, thus helping the greenback appreciate.
EUR – The EUR is weaker versus the USD, having lost 0.7% since yesterday’s close and underperforming against all major currencies. Despite the uplift brought by US-QE3, the EUR has been normalizing lower, sliding further after the release of a generally weaker than expected European Purchasing Managers Index. The Eurozone PMI saw the composite output index fall to a 39-month low of 45.9, the services PMI reached a 38-month low of 46.0; however the manufacturing PMI rose to 46, a six month high. There were some encouraging signs from Germany, which saw the composite output index rise to a 5-month high of 49.7, the services index to a 4-month high of 50.6 and the manufacturing index to a 6-month high of 47.3. The link between the Eurozone’s PMI and GDP is relatively strong, leaving the indices’ release a major concern for investors. Beyond this short-term view, the growth outlook for Europe is the biggest risk to the currency with many analysts expecting EUR to trend lower into year-end.
GBP – Sterling eased some of its recent gains overnight, but remains relatively well supported against both the USD and EUR. Minutes from the BoE’s last meeting showed that policymakers voted unanimously to maintain its bond purchasing target. However, several members felt that further stimulus was “more likely than not” with the Bank’s QE program likely reaching £500B and with a “decent chance” of a rate cut in November. Consequently, the pound’s recent rise appears tenuous at best.
JPY – The yen rose against the dollar, despite the BoJ’s decision to inject a ¥10T in stimulus to boost liquidity in its asset-purchase program. There have been growing concerns over weakening exports due to territorial disputes with China, Japan’s largest trading partner. However, BoJ Governor Masaaki Shirakawa states that the anti-Japanese protests in China did not play a part in the decision to ease. Shirakawa believes Japan’s economic recovery could be delayed by about half a year due to slow economic growth in the euro zone, as well as a decline in China’s manufacturing sector. The decrease in risk appetite underpins the yen, as global economic growth continues to be a concern.
Commodity Currencies – The commodity linked currencies plunged to 2-week lows against the dollar. The CAD weakened due to disappointing global PMIs and falling oil prices. Despite the divergence in Canada’s monetary policy, triple-A rating, and a strong resource base, the CAD remained at the mercy of investor’s flight to the safe haven USD. In addition, the AUD weakened against the USD as Chinese data clouded the prospects for the nations’ resource exports.
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