USD – The dollar is headed into the weekend higher against nearly all of its major counterparts as stocks and commodities look to close out an otherwise strong third quarter with a loss.  Investors are acutely focused on disappointing manufacturing numbers out of the US this morning, with Chicago PMI unexpectedly falling to 49.7 from 53.0.  With a reading below 50 denoting contraction, the number shrunk for the first time since 2009.  Following yesterday’s weak reading of Q2 GDP, investors are fearful that manufacturing will contribute less to economic growth than original hoped for.  Meanwhile, personal consumption came in below expectations at 0.1% – flat from last month’s downwardly revised reading.  Personal spending registered flat from the previous reading at 0.5% and U. of Michigan confidence fell to 78.3 from 79.2.  As such, global markets are limping into the weekend with the investors largely unwilling to enter riskier positions.  Consequently, the dollar remains well supported, albeit within its recent ranges, as investors seek its relative safety.

EUR – The EUR reversed yesterday’s gains against the dollar, falling back in line with the pair’s 200-day MA in the mid 1.28’s.  Yesterday afternoon saw a significant rally for the euro after Spain approved a preliminary draft of its 2013 budget, which included significant reforms to wages, pensions and other benefits.  The conditions are a significant step in the right direction and a strong sign that Spain may soon seek a full sovereign bailout.  In Spain’s case, requesting EU/ECB aid would be a benefit for the common currency as it would help eliminate much of the uncertainty that has been plaguing the nation’s debt markets.  However, with protests likely throughout the nation over the weekend, the lack of popular support will make it difficult for PM Rajoy to capitulate to international creditors further.  The new budget also marks the government’s fifth attempt at spending cuts with the previous four tries clearly falling short.  Meanwhile, investors will take note of results from stress tests done on Spanish banks after the ECB announced a €100B facility to help recapitalize troubled Spanish institutions.  Estimates are that the banks will need a combined €50-60B ahead of the formation of a so-called “bad bank” to which institutions will transfer underperforming loans.  With no data to sway investors otherwise, the common currency will remain towards the lower end of its recent ranges as the outlook for the region remains grim.

GBP – The pound is mixed, falling versus the dollar, but gaining against the EUR.  British government bonds gained for the second straight week as investors increase bets that the Eurozone debt crisis is far from over.  An index of services also gained at the fastest pace in more than a year, adding to evidence that the economy is growing again.  However, the safety appeal of British government assets continues to be overshadowed by the “safe-haven” USD.

JPY – The yen is lower this morning despite the risk-off atmosphere as investors suspect the BoJ may devalue the yen.  PM Noda announced that he will reshuffle his cabinet next week and the Japanese jobless rate unexpectedly contracted – both would-be positives for the yen.  However, with ever more Japanese companies citing yen-strength as the main factor for their weak earnings, speculation is building that a break below 77 would likely trigger another bout of central bank intervention.

Commodity Currencies – The commodity linked currencies are lower this morning as raw good prices mostly decline.  The CAD fell after a Canadian GDP report unexpectedly fell to 1.9% from 2.2%.  The MXN is lower this morning, but will close out the September higher against the USD for the fourth consecutive month as investors suspect that QE3 will fuel demand for Mexican goods.  The AUD and NZD both pared recent gains, but remain supported at the high end of their ranges on expectations that China will ease policy further.


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