v Demand for ECB 3-Yr lending facility far surpasses expectations, highlighting Eurozone banks' weakness;
v US housing sector showing signs of a rebound, but the labor market remains a cause for concern with lawmakers yet unable to strike a deal on extending the payroll tax credit;
v AUD gains to a new all-time high against the EUR as investors are increasingly attracted by Australia's AAA rating.
The USD is mixed this morning as stocks and commodities swing between gains and losses. After yesterday's encouraging housing starts number, a report this morning showed that the sales of existing homes fell far short of expectations, but was much better than in the previous month. The general improvement in the housing sector could prove supportive for the US economy, finally adding to GDP rather than detracting from it as it has over the past several years. However, the other main drag on the economy, the labor market, remains in question with Congressional leaders unable to agree on extending the payroll tax cut with a deadline just two weeks away. The three possible outcomes at this point are either the approval of a stop-gap measure (4.2% rate for a month or two until a final decision is made), an extension of the status quo (4.2% rate in place for another year), or failure to reach an agreement. The effects of a reversion would surely be felt, but the current uncertainty is the most damaging as more than 160m Americans wonder what their paychecks are going to look like next year. Moreover, the inability of Congress to build bipartisan consensus was the impetus for S&P's credit rating downgrade earlier this year. Nevertheless, the general outperformance of the US economy, and the safe-haven appeal of the USD will continue to provide support as the end of the year fast approaches.
The EUR traded through a broad 2% range overnight, initially gaining against the USD after the ECB initiated its first round of 3-Yr lending to Eurozone banks. The Bank awarded 489B EUR in 3-Yr loans today, the most ever in a single operation, and far greater than expectations of demand for 290B EUR. While the ECB's support caused the common currency to initially move higher, those gains have since been given back and then some as investors fear the implications of such high demand for the lending facility. The underlying story in the Eurozone has not changed other than the ECB's bias quickly shifting to be more dovish, which is ultimately a negative for the EUR. Nevertheless, 1.30 remains a significant barrier, and while volatility will increase in light trading during the holidays, the EUR's ranges may persist until the beginning of 2012.
The GBP is mixed this morning, gaining against the EUR, but falling slightly against the dollar. The pound remains a strong alternative to the EUR, with the ongoing debt crisis in the Eurozone supporting demand for the relative safety of British government assets. The yield on 10-Yr gilts fell to a new record low this morning after the ECB actions and after minutes from the BoE's last meeting were more dovish than expected. However, the GBP remains under pressure against the USD after British consumer sentiment fell to the lowest level since 2009, supporting further policy easing from the Bank.
The JPY is slightly weaker this morning, but remains under the 78 handle after Japanese officials gave an improved assessment of the economy's recovery. However, a strong yen remains cause for concern with a government report about the state of the economy saying that, judgment on current business conditions for large manufacturers is deteriorating due to the strong yen.
The Commodity Currencies are mixed this morning with the AUD and NZD falling while the CAD gains. Raw goods are mixed as well with oil gaining to $98.27/bbl, gold falling to $1613/oz, and copper remaining flat at $337/lb. The CAD was the sole winner of the group, but has already given back much of its overnight gains as stocks slip into the red. The rising price of oil, Canada's main export, has provided support, but renewed concerns over Europe is weighing on investors' risk appetite. The AUD is lower against the USD on general risk aversion, but the Aussie has gained to a record high against the EUR as investors seek alternatives to the common currency. Despite the AUD's sensitivity to global growth and commodity prices, Australia's AAA rating is particularly attractive as the credit rating of many of the EU nations comes into question.
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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.