v US jobless claims hold at four-year low of 351K; house price index gains 0.7%;
v German IFO survey unexpectedly gains to 109.6 highlighting the two-speed Eurozone economy; EUR breaks above 1.33 against the USD for the first time in three months;
v GBP is slightly higher after British factory orders gain to a six-month high.
The USD is broadly lower this morning with the dollar index shedding 0.35% on resurgent risk appetite. As investors pare bets that the Eurozone is on the brink of collapse and that the global economy will soon slip back into recession, currency traders are shifting capital out of the ultra-low yielding USD and into higher-yielding assets. Currency market volatility has also been easing as of late with the G7 volatility index falling to 9.78% earlier this morning, the lowest reading since August 2008, making investments in high-yielding currencies all the more attractive. The decline in volatility is supporting a resurgence in the carry trade where investors borrow low-yielding currencies to purchase higher yielding currencies, profiting from the interest rate differential. However, in times of elevated volatility, the carry trade loses its attraction as exchange rate swings threaten to wipe out yield gains and more. Meanwhile, US weekly jobless claims held at a four-year low this morning at 351K, registering slightly better than expected. Continuing claims extended their recent decline, falling to 3392K from 3444K last week. The house price index also improved, gaining by 0.7% over last month, a better result than the expected +0.1%.
The EUR reached a fresh three-month high against the USD this morning as strong economic data out of Germany, the region's largest economy, outshines the ongoing struggles with debt in the periphery member nations. The encouraging data out of the US has also provided support for higher-yielding, but riskier currencies, like the EUR. The IFO survey out of Germany showed an unexpected jump in business confidence as the index registered better than what was forecast at 109.6. The survey also showed that expectations for future economic performance gained by more than expected, rising to 102.3 from 100.9 in the previous reading. Investors will get a look at the pace of German economic growth this evening with the second reading of Q4 GDP. With no new negative developments in Greece or any other of the struggling Eurozone nations, the strong German data is providing enough support for the common currency to test the upper limits of its recent ranges, at least in the near term.
The GBP is mixed this morning, gaining slightly against the USD while falling against the EUR as risk sentiment gains. The pound fell to a 10-month low against the EUR, weakening to as low as 0.8490, after the German IFO report provided support for the common currency. However, sterling remains relatively well supported against the USD as its slightly higher yield proves attractive as compared with USD returns in times of increased risk taking. However, any support that the pound gained early on after an index of UK factory orders rose to a six-month high was largely offset by further dovish commentary from BoE policymakers. David Miles told reporters that he voted to add 75B GBP to the central bank's asset purchase program this month because the economy remains in a precarious situation.
The JPY remained towards the lower end of its recent ranges overnight as investors assume riskier positions en masse. While the yen has begun to weaken as of late, it remains at historically elevated levels, which is forcing large Japanese corporations to move production overseas. In a report from the four major Japanese automakers (Toyota, Honda, Nissan and Mazda) released this morning, the companies' leaders project that overseas production will gain to more than 50% of total production by 2016. With the Japanese economy already struggling to grow, an outflow of jobs and manufacturing could prove detrimental to future stability.
The Commodity Currencies are generally higher this morning on the back of encouraging economic data out of the US, Germany and the UK. Raw goods prices are also on the rise with oil remaining well entrenched above $106/bbl, gold rising to $1785/oz and copper pushing up to $381.lb. The CAD gained after the strong economic reports out of the US, Canada's main trading partner, suggest healthy demand for Canadian exports. A report this morning also showed that Canadian wages gained for the first time in 9 months as Non-Farm pay increased at a 2.4% annualized pace. The gain was higher than the 2.3% pace of inflation for the first time in more than a year, which should in turn have a positive effect Canadian consumer confidence. Similarly, the MXN is higher, supported by the data out of its North American counterparts. The AUD and NZD both reversed early losses as investors are drawn to the G10-leading Australian and New Zealand 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.