v Threat of European downgrade remains and Fitch Rating cuts of five major banks;
v European credit ratings may be cut as soon as Friday, signaled by the shift in the bond market;
v Commodity Currencies are stronger this morning as risk appetite returned to the market after global equities rallied.
The US dollar is slightly weaker across most major currencies as the market retraces some of the week's riskier positions. Despite the IMF's warnings of the future, plunging European export, the threat of European downgrades and Fitch Rating cuts of five major banks including Goldman Sachs, Bank of America and Citigroup, the market is relatively stable.
Domestically, US CPI for November was not far from expectations as the all-items index showed up flat in November, core index (ex-food and fuel) rose 0.2% and the y/y rise at 2.2% vs 2.1%. Goods prices, ex-auto were a bit higher, with apparel prices up 0.6% and computers surprisingly up 0.7%. Meanwhile, gasoline prices are down 2.4% with vehicle prices falling at 0.3%. CPI data is important for how it feeds into Fed expectations and serves as a key measure for monetary policy decisions.
The EUR strengthened slightly against the USD, gaining just 0.10% as we move into the North American trading session. Rising stocks and commodities are adding pressure to the dollar against the euro as investors seek higher risk assets. Furthermore lifting the euro today, Luxembourg's Jean-Claude Juncker said Europe should meet a deadline for arranging loans with the IMF as part of a crisis-fighting package, giving investors some needed confidence in the European crisis. Despite today's recovery, gloomy Eurozone outlook will likely position the EUR back below the 1.30. European bond yields remain volatile with German two-year yield falling to a record low of 0.22%, while Italian and Spanish two-year yields have fallen to 5.05% and 3.19% respectively. Speculation is that rating agencies may downgrade some of European credit ratings as soon as next Friday which could cause the EUR to plummet further towards 1.28 next week.
The GBP is relatively stable against the greenback, hovering near yesterday's close of 1.5514. After testing November's low on Wednesday, the GBP/USD is holding up well. However, technical analysis supports a downward trend for the pair as we head into the first quarter of 2012. With little economic data out from the UK this week, GBP/USD will be largely dependent on risk appetite before the weekend. In focus next week, BoE minutes is scheduled for Wednesday and GDP on Thursday, with figures expected to be unchanged at 0.50%
The Japanese yen traded flat against the USD as risk appetite softly returned but speculation about yen-intervention remains. Japanese officials grew concerned after EUR/JPY fell to record lows to around 100.00. The negative impact of yen appreciation for Japanese exporters may prompt the BoJ to take action at next week's meeting on December 21st.
Commodity Currencies are stronger against the USD as risk appetite returned to the market after global equities rallied. However, AUD gains were limited ahead of the Reserve Bank of Australia minutes scheduled to take place next week. Commodity currencies are expected to strengthen as market players position for the worst in the Euro zone and as oil and equity futures remain well supported.
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.