USD – The dollar is headed into the weekend slightly lower against its major counterparts as investors cautiously reenter riskier positions. Market risk sentiment has steadily improved throughout the week on signs that global policymakers are finally taking steps to backstop their fledgling economies. Investors are hoping that a boost of fresh liquidity in the system, proactive steps to assist troubled European economies, and even a surge in consumer spending thanks to the iPhone5, will be enough to keep the world’s largest economies out of recession. Regarding Apple’s latest offering, economists are predicting that iPhone sales will be enough to add 0.5% to US Q3 GDP – a near 30% increase to the current pace of growth. However, the bump may be slightly misleading as anticipation of the new phone’s release likely kept consumers from purchasing phones for much of the last six months. Elsewhere, investors are focused on developments in the Eurozone with signs that Spain may be close to requesting a bailout providing support for the EUR/USD exchange rate.
EUR – The euro has traded through a particularly volatile overnight session, swinging half a percent to either side of the key 1.30 handle vs. the USD. Investors are feeling a bit better about the EUR’s prospects after Eurozone officials met to discuss a possible “bailout” for Spain. In addition, Spanish and Italian leaders agreed in principle to continue working towards financial market stabilization throughout the currency bloc. Italian PM Monti told reporters in a statement that European governments “need to proceed toward a full accomplishment of economic and monetary union and create conditions for growth and the creation of jobs.” While Monti’s sentiment is surely shared by his counterparts elsewhere in the Eurozone, today’s summit was the 21st time policymakers have met to discuss the region’s future over the past three years. In a separate press release, Monti hinted that neither Spain nor Italy would likely request international assistance unless a new surge in bond yields shut them out of markets. Consequently, the common currency remains 0.8% lower for the week against its G10 peers. While steps towards a Spanish “bailout” would help alleviate some of the uncertainty surrounding the region’s fourth-largest economy, a plan likely won’t crystallize until the eleventh hour when the nation’s economy and government both are pushed to the edge.
GBP – The pound rallied overnight against both the USD and EUR as investor risk appetite picks up. With little major economic data due before the weekend, the pound has benefitted from the broad-based dollar weakness. However, gains likely will be limited as a report showed a 70% chance that the UK will lose its AAA credit rating by the next general election (2015), with a 25% chance that it will happen in the next several months.
JPY – The yen consolidated in its recent ranges as the Japanese political situation calms, at least for the time being. PM Noda decisively won the leadership role of the Democratic Party of Japan – the current ruling party. However, recent polls show the DPJ likely wining only 14% of a general election as compared to the 31% going to the opposition LDP.
RMB – The Chinese yuan has extended its longest winning streak (8-weeks) since early 2008 on optimism that more capital will flow into the second largest economy as central banks ease monetary policies elsewhere. The yield gap between US and Chinese government assets has been widening, hitting the largest in five months today, and thus fueling expectations of further renminbi appreciation. However, a breach of the 6.30 handle that the PBoC has been protecting all year could prompt defensive steps from the Chinese authorities.
Commodity Currencies - The commodity linked currencies are generally higher as the risk-on trade prompts investors to seek their relatively high yields. The CAD erased early gains, but remains towards the top of its recent ranges, after a report showed Canadian inflation slowing for the second straight month. The rebounding price of oil – Canada’s main export – has also provided support. Similarly, the AUD and NZD are also both stronger this morning as rising stocks and commodities encourages investors to seek their relatively high yields.
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