USD – The dollar erased much of yesterday’s gains in early trading as stocks and commodities turned positive. The risk-on trade gained momentum after several better than expected economic releases out of the US. First, consumer confidence soared last month, with the gauge jumping to 70.3 from 61.3 in the previous reading, and better than the 63.1 that was expected. The number marks a seven-month best as rising home values and stock prices bolster sentiment. Investors are hoping that the improved atmosphere will translate into an increased willingness for consumers to open their wallets, which could prove to be a boon for the economy headed into the later part of the year. Meanwhile, a measure of manufacturing activity in the Richmond, VA area rebounded, rising to 4 after posting -9 last month and beating the consensus forecast for a reading of -5. And finally, the house price index extended its gains in August, albeit by a lesser margin than expected. Prices have now recovered to levels last seen in 2003, but remain lower than their 2006 peak. Consequently, the dollar has eased from its recent highs this morning as demand for its relative safety wanes in the near term. However, relatively positive economic fundamentals combined with the ongoing Eurozone debt crisis and an apparent slowdown in East Asia, will keep the dollar’s losses in check.

EUR – The euro is marginally higher today, but remains well entrenched within its recent ranges gravitating towards the 1.30 handle vs. the USD. As was expected, the common currency tested its 200-day MA against the dollar at 1.2888 in overnight trading before rebounding with the risk-on trade gaining traction. However, the outlook for the EUR remains cloudy at best with continued political infighting amongst the region’s policymakers. ECB President Draghi took a speech before German businessmen in Berlin today as an opportunity to jab at the Bundeskbank. Defending the ECB’s recently announced bond-buying program, Draghi said, “either you do nothing…and allow the singleness of monetary policy to be undermined, or you take action. The greatest risk to stability is not action, it’s inaction.” German policymakers see the plan as tantamount to printing money and supporting reckless spending in the region’s weaker economies. Draghi did highlight the conditionality of the bond-buying program, and that it is be a tool to encourage governments to implement reforms. However, it’s these preconditions that are causing a bit of uncertainty amongst the region’s periphery with Spain holding off seeking further aid until the full conditions are known. Echoing the need for further work, Draghi cautioned that “the current improvement in sentiment doesn’t mean that everything is solved.”

GBP – Sterling is again mixed this morning, gaining against the USD while pulling back versus the euro. Much of the impetus for the recent surge in the pound is a pending EU farm subsidy payment due to fix at the end of this week. As part of the EU’s $75B/year Common Agricultural Policy, subsidies are paid out to the region’s farmers with $4.25B due to the UK. It’s a rare occasion in the FX market for so many participants to know about such a large transaction ahead of time. With investors otherwise largely in a holding pattern, waiting for the next shoe to drop in the Eurozone debt crisis, Friday’s large subsidy payment presents a buying opportunity for GBP investors.

JPY – The yen is little changed this morning even as market sentiment is increasingly risk-on. Data due tonight is expected to show that foreign ownership of Japanese government bonds surpassed stock holdings for the first time ever as the appreciating yen draws demand to the nation’s debt while wrecking finances at the country’s leading companies. Lax monetary policy in both the US and Europe, combined with the ongoing debt crisis will keep the yen well supported in the near term.

Commodity Currencies – The commodity linked currencies are generally higher today as investors seek their relatively attractive yields. The CAD rebounded from yesterday’s declines as Canadian retail sales jumped 0.7% after last month’s 0.3% shortfall. Similarly, the AUD is higher as investors seek its G10-leading yields. However, gains will likely be limited as investors suspect the RBA may ease policy further when they meet next week.

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