v Risk appetite rebounds with stocks and commodities both set to begin the day in the black;
v Investors were encouraged by strong demand for Spanish debt auction today;
v Commodity Currencies are stronger this morning as rebounding investor confidence and rising raw good prices provide support.
The USD is sharply lower this morning as market risk appetite rebounds with stocks and commodities both set to begin the day in the black. Trading has been quite volatile overnight as signs of thin liquidity ahead of the holiday season are already evident. Nonetheless, stronger than expected economic data out of the US has investors feeling a bit better about global economic growth prospects. US housing starts jumped to a 1.5 year high this morning, reflecting an improved outlook for the economy despite persistent weakness in the labor market. While the data is a welcome respite, the general atmosphere is hardly risk-on at this point. With the continued debt crisis unfolding in Europe, escalating tensions in the Middle East, and now political upheaval in North Korea, the USD remains well supported within its recent, stronger ranges.
The EUR distanced itself from the key 1.30 level this morning on the improved investor risk sentiment, but supported by little new news. The IFO survey, a gauge of German business confidence, registered better than expected at 107.2 versus a forecast of 106.3, indicating robust business conditions, at least in Germany. Investors were also encouraged by strong demand for Spanish debt up for auction today, driving yields to 2.5% versus 5.3% in the last auction of similarly dated bonds. If the success of the Spanish auction are signs of things to come in the new year, the funding constraints that have been such a cause for concern in Italy, Spain and the other periphery economies, will fade in due time. However, one strong auction after months of shortfalls and rising yields is hardly a trend. While lower yields would certainly help alleviate the funding squeeze, many of the Eurozone nations are already on the brink of a credit rating downgrade, with France clearly the main focus of S&P's attention. Improved auctions will help, but unless the trend quickly gathers momentum, it may be too little too late.
The GBP recovered from recent losses against the USD and EUR as the improved sentiment has provided support. Despite stagnant economic growth and a weakening labor market, British consumer confidence unexpectedly improved from last month, providing support for the cable. The pound has also remained higher against its mainland European counterpart despite the improvement in sentiment there as it remains the main local alternative. PM David Cameron's decision to distance the UK from its EU brethren has also proved supportive as the weaker members of the EU threaten to drag down the strongest economies.
The JPY pushed back towards the top of its recent ranges as regional political concerns prompt investors to seek the yen's relative safety. While the power transition from father to son in North Korea will likely be uneventful, the military is making a show of its might to ward off any opportunistic neighbors that may see the transition as a moment of weakness. However, as in months past, an appreciating yen often begets uneasy BoJ policymakers. The Bank announced this morning that they would increase their intervention war chest, but it appears with assets other than just USD's. Finance Minister Azumi told reporters that the MoF is considering the purchase of Chinese bonds, a sign of China's growing influence, but also expectations of continued RMB appreciation. With heightened tensions in Asia and Europe, the yen will remain well supported as a proxy for market risk.
The Commodity Currencies are generally higher this morning as rebounding investor confidence and rising raw good prices provide support. Crude oil prices rose to $97.28/bbl, gold is up to $1,617/oz, and copper climbed to $338/lb. The CAD continues to gain on the rising price of oil, Canada's main export, and the strong data out of the US, Canada's primary trading partner. However, Canadian CPI data was released short of expectations this morning, suggesting that the BoC will remain on hold for the foreseeable future and possibly even turn more dovish in the coming months. The AUD rebounded from recent lows, breaking back above parity with the USD as minutes from the RBA's last meeting proved more hawkish in tone than what was expected. The NZD and ZAR are similarly stronger this morning on improved risk sentiment and on the rising price of commodities. This group of currencies remains susceptible to particularly volatile swings heading into the holidays as liquidity thins in not only currencies but commodities as well.
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.