v Thin liquidity is adding to market volatility with the US up sharply against most of its major counterparts;
v Italy's auction of 9B EUR worth of short-dated bonds was a runaway success, with yields tumbling by nearly 3% from the last auction of similarly dated assets;
v Commodity currencies have been particularly hard hit by the increase in risk aversion and as stocks and commodities pare yesterday's gains.
The USD is sharply higher against most of its major counterparts as renewed concerns over the health of the global economy are being amplified in thin market liquidity. With no major economic data set for release today, currency traders are focused on the persistent troubles in Europe. With stocks and commodities slipping into the red, they are turning to the dollar as a relative safe asset. Unfortunately, the USD strength isn't necessarily an accurate reflection of the economy with unemployment remaining high and growth being tepid at best. The political divides are proving troublesome in the US as well, and while the payroll tax credit was extended in the eleventh hour for another 60 days, the battle will surely polarize even further in the coming months as the 2012 Presidential race heats up. Nevertheless, with the revolving schedule of global holidays sapping liquidity for the remainder of the week, investors will remain drawn to the dollars relative strength and stability.
The EUR is sharply lower this morning, making its first convincing break below the psychological 1.30 level since January. The move came as the ECB released the most recent reading of the Bank's balance sheet, which jumped to a record 2.73 trillion EUR in the past week. The sharp move higher came as the ECB started a new lending program extending unlimited 3-Yr loans to Eurozone banks. Investors are fearful that while the ECB hasn't pursued a quantitative easing program like the Fed or the BoE, the Bank's ballooning balance sheet shows similar signs of monetization. The move lower comes as Italy held a very successful debt auction, selling 9B EUR worth of bills at a yield of 3.251% versus 6.504% at the last auction of similarly dated securities.
Sterling is weaker this morning against all 16 of its most actively traded counterparts. The drop comes despite increased demand for British government bonds as mainland Europe continues to struggle with a mounting debt load. Investors booking profits on the pound's recent gains before year end will pressure the British currency in the near term while a worsening economic outlook will continue to weigh on it in the longer term.
The JPY is relatively flat against the USD this morning, but reached a fresh all-time high against the EUR as concerns that Europe's debt crisis will slow economic growth spurred demand for safe-haven assets. Japanese data was quite weak overnight, with industrial production dropping by 2.6% from last month, far worse than the expected decline of 0.8%.
The Commodity Currencies are all lower this morning as falling stocks and commodities prompt investors to seek safe assets. Oil fell back below $100/bbl as weakened growth prospects outweigh increased tensions in the Middle East. Gold fell to $1567/oz, copper dropped to $337/lb and consumables were generally lower. The CAD has slipped from its recent highs this morning on the declining price of oil, Canada's main export. The AUD and NZD are also both lower on the reduced appetite for risk. The ZAR extended its recent declines, falling another half of a percent and extending its annual decline against the dollar to 19%. Nevertheless, the outlook for African and emerging markets as a whole are quite good in the longer term with strong demand coming from China. An interesting report released this morning showed that China's ExIm bank extended more loans to sub-Saharan Africa in the past than the World Bank.
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.