v US Consumer Confidence tumbles to 61.1 versus 68.0 expected as rising energy prices and continued labor market weakness weighs on household spending;
v Eurozone policymakers hope to have a Greek debt deal done by the end of the week; policymakers signed off on two new treaties to increase fiscal ties and establish a permanent bailout fund;
v JPY continues to grind higher as the spread between short-term US and Japanese interest rates fell to 40.5bps, the lowest since 1992.
The USD is mixed this morning against its most actively traded counterparts, gaining against most European currencies while remaining lower against the higher-yielding commodity and emerging market currencies. The dollar has pared early declines after disappointing US data sapped demand for riskier assets, pushing both stocks and commodities into the red. Most notably, consumer confidence tumbled to 61.1 versus the median expected gain of 68.0, a disappointing result after two straight months of surprising results. The reading proved lower than even the most pessimistic forecast as economists did not account for the pressure higher energy prices were placing on households with jobs still difficult to find. The weakness highlights just how fragile consumers believe the economic recovery to be, and reflects poor job prospects as well as the intensifying political divide that has gridlocked Washington. Elsewhere, Chicago PMI dropped to 60.2 from 62.2 and S&P CaseShiller Home Prices fell by more than expected. While encouraging economic data had begun to show signs of support to the dollar in the later part of 2011, the positive tone has given way to clear signs of a slowing economy thus reignited the debate between safe-haven demand and further quantitative easing in the US.
The EUR turned early gains into sharp losses against both the USD and GBP after the disappointing data out of the US sent investors seeking relatively safer assets. The common currency had initially pushed higher after Greek PM Papademos told reporters that he's focused on the target of brining the negotiations to a successful conclusion by the end of the week including the much-debated haircut to be imposed on the private sector. The EUR also gained after Eurozone officials finalized a permanent 500B EUR rescue fund and signed off on a deficit-control treaty. However, with sovereign debt yields again on the rise elsewhere within the Eurozone, there is little confidence that even should a Greek debt deal be completed on time, the underlying economic deficiencies will be addressed.
The GBP is stronger against both the USD and EUR this morning, riding high on yesterday's encouraging economic data. British consumer confidence gained to the highest level in seven months as slower inflation eased the pinch on household spending. The pound gained even after BoE Governor Mervyn King told reporters last week that he expects inflation to slow sharply this year and that policy makers have room to ease monetary policy further. Energy costs are also falling in response to a drop in wholesale costs. Nevertheless, the turmoil in mainland Europe threatens to tip the UK into another recession, and labor conditions likely won't improve in the near term, thus making the current sterling-strength likely temporary.
The JPY rose against its major counterparts this morning, with the decline in G10 yields adding to the attractiveness of safe-haven Japanese assets. The difference in interest rates between the US and Japan shrank to 40.5bps overnight, the least since 1992. With the US Fed having now pledged to keep interest rates at ultra-accommodative levels until at least late 2014, investors are again being lured by the yen's relative stability. However, a strong yen threatens to slow the Japanese economy further, and drive Japanese business overseas. The yen has gained against all 16 of its most actively traded counterparts over the past year, thus pressuring the BoJ to intervene in currency markets yet again. Overnight Japanese Finance Minister Azumi warned that they would take decisive steps against excessive and speculative moves in the currency market if necessary. However, with the lack of lasting results from the BoJ's previous bouts of intervention, any push higher from a round of yen-selling without further coordinated central bank action and/or monetary easing will likely result in only a brief reprieve.
The Commodity Currencies are mixed this morning with the CAD lower, the AUD flat and the NZD sharply higher. Raw goods remain largely within their recent ranges with oil at $99/bbl, gold at $1735/oz, and copper at $379/lb. The CAD again strengthened past parity with the USD for the second time in a week, but has since pared the move higher after the disappointing consumer confidence report out of the US. As Canada's largest export market, the health of the US economy is paramount to CAD strength. The AUD initially gained on hopes that progress is being made in European debt talks, but a lack of economic data has kept the Aussie largely bound to its recent ranges. Meanwhile, the NZD continued its streak of gains after last week's surprisingly high trade surplus. The Kiwi has been the best performing G10 currency year to date as relatively high interest rates and an economic recovery that appears to be gaining momentum attract investors.
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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.