v US ISM falls short of forecasts at 54.1, but remains at a 7-month high; ADP falls short of expectations at +182K;
v Manufacturing in both Germany and France surprised to the upside, quelling fears of an imminent region-wide recession;
v Commodity Currencies gain the most against the dollar with the ZAR up nearly 2% on the resurgence in risk appetite after global manufacturing outpaces expectations.
The USD pared yesterday's gains against nearly all of its major counterparts as markets breathe a sigh of relief on better-than-expected global manufacturing data. The dollar lost further appeal as stocks spiked higher around the globe on expectations that an IPO for the social networking giant Facebook is forthcoming. The improved risk sentiment is sapping the dollar's safe-haven appeal, but the USD does remain entrenched within its recent ranges. While manufacturing data surprised to the upside in Asia and Europe, ISM Manufacturing here in the US fell short of expectations at 54.1 showing only a modest gain over last month's reading of 53.9. Despite being less than the consensus forecast of 54.5, the gain was good enough for the fastest pace of expansion in more than seven months, suggesting that manufacturing will continue to drive the economic recovery in 2012. However, ADP employment showed that the private sector added fewer jobs than expected at +170k versus +182k that was anticipated. The number is also sharply lower than the previous month's downwardly revised gain of 292k and does not bode well ahead of this Friday's key NFP and unemployment reports.
The EUR pushed back to the top end of its recent ranges against both the USD and GBP overnight as a European manufacturing survey beat expectations. With Chinese, UK and US manufacturing showing similar signs of growth, the common currency has gained as fears of an imminent global slowdown abate, at least for the time being. However, it remains to be seen if the rebound in European output can be sustained with the EUR beginning to move back higher against the USD after reaching a 17-month low on January 13th. However, while ECB President Draghi's interest rate cuts and injections of liquidity have been more proactive than those of his predecessor, the European policy stance remains more conservative than that of the Fed. With the regional economy struggling to remain afloat, expectations are building that Draghi favors a weaker EUR. ECB research shows that a 10% drop in the trade-weighted value of the euro adds 0.7% to GDP growth in the first year and more than 1.2% in the second. With these rather attractive metrics, it appears that the ECB may cut interest rates further in the coming months as an appreciating currency crimps demand for European exports.
The GBP is also sharply higher against the USD, supported by a surprisingly strong reading of UK PMI manufacturing. The measure gained to 52.1 versus 49.7 in the last reading, an eight-month high, and an unexpected return to growth after a quarter of contraction. The British report is particularly surprising as the debt crisis in the Eurozone, the main destination for exported British manufactured goods, has weighed on demand. Recent dovish commentary from the BoE will likely limit the sterling's gains in the near term, but the strong economic data will provide support in the interim.
The JPY reached a fresh three-month high against the USD overnight, supported by speculative capital flows. The yen gained despite the surprising manufacturing results, which have alleviated some of the fears of an imminent global economic downturn. With the yen again nearing the 75 handle against the USD, interventionist rhetoric from Japanese officials has picked up considerably. However, recent easing against the EUR removes some of the pressure on the yen. Nevertheless, should the USD/JPY rate drop into the mid 75's, another round of JPY-selling from the BoJ can be expected.
The Commodity Currencies were the best performing group overnight as risk assumption gained momentum on easing global growth fears. Raw goods remained surprisingly flat with oil at $98.60/bbl, gold at $1750/oz and copper flat at $381/lb. The CAD advanced to a three-month high against the USD on the stronger-than-expected global manufacturing reports, particularly the ISM out of the US, Canada's main trading partner. The AUD gained a percent against the USD, reaching its highest level in more than four months as investors seek higher yields. However, with the AUD moving higher and with metal prices still relatively low or even falling, global mining powerhouses are planning to cut production in Australia by as much as 30% in 2012 as profit margins are squeezed. With the mining boom set to ease, slower growth in Australia may limit the Aussie's upside potential in the longer term. The ZAR was the best performing currency overnight, gaining nearly 2% against the USD on the resurgence in risk appetite.
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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.