v USD mixed as Fed FOMC meeting eyed; no change in monetary policy expected, but investors will take note of any lingering dovish sentiment;
v EUR remains under pressure on increased speculation that Portugal will soon need more financial assistance, followed soon by Spain and possibly Italy;
v Commodity Currencies are outperforming their peers as gaining stocks and commodities provide support for the high-yielding currencies.
The USD is mixed this morning, gaining against the EUR and JPY, but falling against the GBP, CAD and most higher-yielding currencies. The divide comes ahead of the Fed's FOMC rate decision due at 11:15am PST. While no change in interest rates is expected, investors will pay particularly close attention to accompanying commentary. Amidst the recent string of relatively strong economic figures, with particularly encouraging improvement in the labor market and manufacturing sector, expectations of a third round of quantitative easing are quickly fading. However, unemployment remains relatively high and any hints of lingering dovish sentiment could see the dollar quickly retrace its recent gains, especially against the EUR and JPY. Meanwhile, US retail sales minus the volatile auto and gas components advanced by more than expected at +0.6%, but proved slightly lower than last month's 1% gain. With autos and gas accounted for, sales gained by 1.1% on the sharp rise in gas prices.
The EUR extended its recent declines overnight on ongoing concerns that the broader region remains at risk for further economic contraction. While the immediate default risks in Greece have abated after the Eurozone finance ministers finally signed off on the nation's second bailout package, the larger regional economic deficiencies persist. The ECB's recent injection of more than EUR 1 trillion into the European banking system has eased funding pressures for nations like Italy, Spain and Portugal, but investors are said to be already pricing in which nation will force losses on its investors next. Portugal appears to be next in line, but with Spain recently raising their budget deficit target to 5.8% from 4.4% for 2012, investors are already looking ahead to the fallout from a possible credit event in Spain and Italy, the region's fourth and third largest economies respectively. Moreover, while the ECB kept interest rates on hold at the culmination of their meeting last week, investors don't appear to believe that the central bank is done providing support to the region with further interest rate cuts and possible further LTRO operations expected in the coming months. The ECB's more dovish stance has provided impetus for investors to short the EUR in the near term as it loses some of its yield appeal.
The GBP is higher this morning against both the USD and EUR, supported by the general risk-on environment and surprisingly strong British housing data. The house price index added three percentage points, climbing to a 19-month high. However, the pound's gains may be limited as investors exit safe-haven positions, such as British government bonds, as the immediate threat of disaster in the Eurozone subsides and risk appetite begins to gain. In the near term, the GBP will likely remain well within its recent ranges with its top and bottom's likely limited by its 200 and 55 day moving averages at 1.5875 and 1.5660 respectively.
The JPY is lower this morning against most of its major counterparts on the rise in risk appetite and after the BoJ kept an easing bias to its policy stance. While the central bank did not increase its asset purchase program or ease policy further, the BoJ did increase the amount of loans available through the Growth-Supporting Funding Facility, as was widely anticipated. However, the accompanying commentary did suggest that the Bank will remain proactive in introducing further rounds of stimulus until inflation ticks higher towards the recently instated 1% target rate.
The Commodity Currencies are generally higher this morning after the encouraging US retail sales data suggests stronger global economic growth. Raw goods are also higher with oil gaining to $106.75/bbl, copper rising to $390/lb and consumable generally more expensive. The CAD is higher, supported by the rising price of oil, Canada's main export, and the gain in US retail sales, the primary destination for Canadian exports. Similarly, the MXN is higher against the dollar as investors expect the improving data to translate into an increase in demand for Mexican exports. The AUD and NZD are both well supported this morning as the resurgence in risk assumption makes their G10 leading yields increasingly attractive. With stocks testing recent highs, these high-yielding, growth-sensitive currencies will push towards the top of the recent ranges in the near term.
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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.