v EU leaders downplay expectations ahead of a much anticipated leaders summit this Friday;
v S&P announces that should one of the Eurozone's AAA-rate nations lose the coveted status, the EFSF would also lose its AAA rating;
v AUD gains despite yesterday's RBA cut after GDP registered better than expected.
The US Dollar is mixed this morning, remaining within its recent ranges against most of its major counterparts ahead of a much anticipated EU leaders' summit this Friday. However, with high hopes comes substantial risk, and while investors appear confident that European leaders would show progress this Friday, this morning, EU leaders are trying to downplay the summits significance. As such, the USD remains well supported as a proxy for market risk sentiment, but its upside potential remains limited by the lack of supportive economic data. Ahead of Friday's meeting, the dollar will likely remain relegated to its recent ranges as investors weigh its appeal as a safe-haven versus the potential fallout should the EU summit fail to meet expectations.
The EUR is marginally lower this morning, retreating from overnight gains as EU leaders scramble to manage expectations ahead of this Friday's EU summit. The so-called Merkozy plan devised by German Chancellor Merkel and French President Sarkozy is said to take substantive steps towards fiscal consolidation within the EU, and pave the initial way for Eurobonds. However, any steps towards common debt issuance would need the approval of all 27 EU members, not just the 17 nations that use the euro. Not only is this unlikely to happen quickly, but it's a stretch to believe that countries like England and Poland that don't use the EUR would agree to share common government bonds with the likes of Greece, Spain and Italy. Turning up the pressure even more, S&P followed up their surprise announcement that it was placing 15 Eurozone nations on watch for a credit downgrade, by announcing this morning that should one of the member nations lose their AAA rating, the regional bailout fund, European Financial Stability Facility (EFSF), would lose its AAA rating as well. Nevertheless, the common currency remains well supported within its recent ranges of 1.5% to either side of 1.35 as investors still widely believe that at least some progress will be made at this Friday's summit.
The GBP was the best performing currency overnight, gaining against both the USD and EUR as investors turn to British government bonds as a hedge against the increased Eurozone concerns. The yield on 2-Yr Gilts dropped to a record low as declining European stocks prompted the flight to the government assets' relative safety. However, signs of further economic slowing in the UK limited the pound's upside potential. Factory output in Britain slid 0.7% from September, greater than the 0.3% decline that was expected. Despite the apparent slow growth in the UK, the pound has been the third best performing G10 currency, behind only the USD and JPY, over the past three months, gaining 2.3% against its peers.
The JPY is relatively flat this morning despite the uptick in risk aversion as global stocks and commodities selloff. The USD, GBP and government bonds have been increasingly turned to as viable safe-haven assets, as the specter of further BoJ intervention crimps demand for the yen. BoJ officials, past and present, have become increasingly outspoken over the past two weeks, with one official suggesting this morning that the central bank ought to consider purchasing foreign assets denominated in foreign currencies as a way to weaken the yen in the longer term.
The Commodity Currencies are mixed this morning with the AUD gaining while the CAD, NZD and ZAR all retreat from recent highs. Oil fell to $100/bbl, gold was flat at $1733/oz, and copper slipped to $354/lb. The AUD unexpectedly gained after yesterday's RBA interest rate cut, after a report released this morning showed that the Australian economy is growing faster than expected, prompting investors to trim bets of further interest rate cuts. The CAD slipped after yesterday's gains on the increased risk aversion and as the price of oil, Canada's main export, fell back below $100/bbl in early trading. The NZD and ZAR both pared recent gains as well with the reduced appetite for risk. While this group of growth-sensitive currencies will struggle to post significant gains in the near term, the AAA rating of Australia and Canada is increasingly attracting investors to these countries' currencies and government assets as an alternative safe investment, thus providing support.
CHANGE FROM CLOSE
10-Year Treasury Yield:
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.