USD – The USD begins the day stronger against nearly all of its major counterparts as stocks and commodities both extend yesterday’s late-day declines. The dollar index has now rebounded nearly two percent from its recent low reached on September 14th after the Fed unveiled QE3. In light of the global economic slowdown and the worsening debt crisis in Europe, futures show that investors have been adding long-dollar positions at the fastest pace in three-years. On the data front, a measure of US new home sales unexpectedly stagnated at 373K vs. the consensus forecast for a gain to 380K. However, after nearly four years of falling home values, today’s drop in sales is likely reflective of the recent notable gains in home prices. Policymakers are hoping that depressed interest rates and an increase in liquidity will encourage lenders to pass on the savings at the consumer level, thus spurring a further rebound in the housing market. Yet, not all Fed members are clearly on the same page with Philly Fed President Charles Plosser – a staunch hawk – slamming QE3 yesterday. Bluntly, Plosser noted that “we are unlikely to see much benefit to growth or employment from further asset purchases.” He went on to say that the Fed should be more focused on retaining its credibility in keeping inflation in check, and that the interest rates will likely rise “well before” the current guidance of mid-2015. While Plosser’s comments are not completely unexpected, they certainly helped stall the risk-on rally.
EUR – The euro broke below its 200-day MA level of support for the first time since September 10th as political squabbling and civil unrest take their toll. German Bundesbank President Jens Weidmann jabbed back at the President of the ECB after Draghi called his stance yesterday as “nein zu Allem,” or roughly “no to everything. Weidman told reports that it’s certainly “not my impression that I’m saying no to everything. The central bank has acted in the crisis and taken a lot of measures to prevent an escalation…I don’t relate this comment to me, despite it being said in German.” Meanwhile, protests in Greece and Spain turned violent as the unemployed took to the streets in objection to fresh austerity measures. Spanish leaders are also now facing a secessionist movement in Catalan, the nation’s most prosperous state. Meanwhile, Spanish policymakers said that the nation’s GDP contracted further this quarter with unemployment continuing to edge higher. Bond yields are thus on the rise with the Spanish 10-Yr breaking back above the 6% threshold for the first time in three weeks. In the near term, the common currency will likely consolidate within its new lower ranges, with the next major level of support in the high 1.26’s vs. the USD at the 50-day MA.
GBP – The pound is again mixed with demand for the safety of British assets providing support against the EUR, but not enough to post gains versus the dollar. Gilts gained by the most in more than a month as the ongoing debt crisis in mainland Europe boosts the appeal of British assets. Cable also rose against the EUR after the Confederation of British Industry’s gauge of annual sales growth increased for the first time in three months.
JPY – The yen is flat against the USD this morning, but is nearing a 12-year high versus the EUR. In light of the recent appreciation, the Japanese MoF announced this morning that it will be extending its FX monitoring program through the end of the year. The oversight was first introduced last year after a series of devastating natural disasters led to sharp gains in the yen. While further intervention is unlikely in the near term, investors will be reticent to test the BoJ with the yen nearing multi-month highs.
Commodity Currencies – The commodity linked currencies are generally lower this morning as investors’ risk appetite wanes. In early trading, the CAD slipped to its weakest since the beginning of the month as oil – Canada’s primary export – extended its recent declines, falling below the key $90/bbl handle. Similarly, the risk-off trade is sapping demand for the AUD. Moreover, Australian PM Gillard’s efforts to run a budget surplus for the first time in five years are limiting the currency’s gains with fewer Australian government assets up for auction for overseas investors.

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