v EUR declines against its major counterparts after EU officials signal that a new Greek austerity package is too little too late;
v USD gains in its role as the de facto safe-haven currency; the trade balance unexpectedly widens to -$48.8B, U. of Michigan Confidence falls to 72.5;
v Commodity Currencies pull back from recent highs on heightened risk aversion, but they remain well supported by their relatively high interest rates.
The USD is set to close the week on a strong note as resurgent fears over European debt keep the dollar well supported in its role as a safe-haven currency. Greek authorities signed off on stringent austerity measures that have already incited riots in Athens and public outcry as the measures will cut into the welfare state and weigh heavily on the already struggling economy. However, EU officials signaled that the measures may not be enough to secure a second bailout package that is necessary for Greece to avoid default in the coming months. Meanwhile, US data suggested a slight stalling of the US economy with the trade balance widening more than expected and University of Michigan confidence unexpectedly dropping to 72.5 from 75 in the previous reading. With stocks and commodities taking an early hit and looking to close out the week in the red, the USD will likely remain well supported by the flight to quality.
The EUR pared recent gains overnight, but remains within its recent ranges after the German Finance Minister suggested that Greece's new austerity measures are too little too late. In light of the EU comments, deeper spending cuts will likely have to be suggested in the coming days, but with growing social opposition and impending Greek elections, opposition party members have made it clear that they will not approve even deeper cuts. Greek Finance Minister Evangelos Venizelos said it right when he told reporters that the upcoming vote was essentially a decision on whether to remain in the Eurozone or not. Absorbing massive wage cuts, government downsizing and pension reform is not going to gain popular support, but the alternative is a disorderly default and an exit from the EUR. Neither option is a particularly good one. However, the common currency remains generally supported as investors struggle to find a viable alternative. But the writing may be on the wall with Russia announcing overnight that it would be greatly reducing its EUR denominated FX reserves and replacing them largely with AUD and CAD holdings.
The GBP is mixed this morning, gaining against the EUR while falling against the USD as the Greek debt crisis again takes center stage. Yields on British bonds fell by the most in two months as investors sought the relative safety of government assets. The yield on the 10-Yr gilt tumbled to 2.141% as investors look for safe-haven alternatives to EUR denominated assets. The pound also rose against the EUR after a report showed that British producer prices climbed at the fastest pace in nine months, suggesting that the BoE is unlikely to ease policy further in the near term.
The JPY is higher this morning against all of its major counterparts on the resurgence in risk aversion and as Finance Minister Azumi distanced himself from comments he made about the BoJ's last round of intervention. He told the parliament that he instructed an intervention when the yen was 75.63...and finished when it was 78.20. However, he apparently did not mean that the level prompted the intervention just that the USD/JPY pair closed at 75.63 the night before. But the official closing price on the 28th was 75.82 and the opening price on the 31st was 75.61. He did reiterate that Japanese officials have no reservations about conducting another round of intervention to stem the yen's strength, and now markets will be closely watching 75.63..
The Commodity Currencies are sharply lower this morning, but still remain towards to high end of their recent ranges. Raw good prices are generally lower with oil dropping to $98/bbl, gold falling to $1724/oz, and copper tumbling 3% to $387/lb. The CAD is down on the lower price of oil, Canada's main export, and on the weaker data out of the US, Canada's main trading partner. The AUD and NZD are also both lower as investors seek safer investments and after the RBA downgraded their outlook for Australian economic growth in 2012 and 2013. The ZAR was the worst performer overnight against the USD, particularly hard hit by the Greek debt concerns with the Eurozone representing the main destination for South African exports. Nevertheless, with currency volatility surprisingly falling to a 4-Yr low, this group of currencies remains generally well supported by their relatively high yields.
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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.