v Risk aversion takes hold of the market, driving the USD index to a two-month high;
v German bond auction is undersubscribed, prompting investors to fear that the region's so-called debt contagion is no longer relegated to the periphery economies;
v Report shows that Japanese investors have purchased more UK Gilts than German Bunds this year as the global safe-haven paradigm is shifting to no longer include the Eurozone's largest economies.
The US Dollar is sharply higher against all of its major counterparts this morning as risk aversion again takes hold of the market. Yesterday's disappointing GDP figures out of the US are having a delayed affect on global financial markets, with both stocks and commodities slipping deep into the red as investors fear the global economy is headed back into recession. Investors had been hopeful that both developed and emerging markets could decouple from the Eurozone turmoil, but it appears that the systemic affects are unavoidable. Moreover, most economists are predicting Q4 to be the peak in US GDP with an imminent slowdown ahead in 2012 as cost-cutting measures drag on economic growth. These concerns will be only further compounded should the payroll tax and unemployment benefits not be extended. Durable goods orders here in the US also dropped by 0.7%, but that was slightly better than last month's decline of 1.5% and the forecast of -1.2%. Weak data out of China also points to a forthcoming global slowdown as Chinese PMI unexpectedly dropped to 48.0 versus 51.0 in October - a reading below 50 denotes contraction. In the near term, the negative data will continue to provide significant support for the USD.
The EUR fell to a fresh six week low against the dollar after a German government bond auction was undersubscribed. Investors bid on 3.889B euros of bunds versus the 6B up for auction, prompting investors to question the German assets' role as a safe-haven instrument. The failed auction demands the question, if Germany can only muster such weak demand, what hope is there for the rest of the Eurozone nations? In the near term, the common currency will struggle to post any sustainable gains with the concerns now quickly spreading beyond isolated incidents in the region's periphery.
Sterling is weaker against the USD, but stronger on the EUR this morning after investors were spooked by the surprisingly bad German bond auction. The pound gained against its mainland EUR counterpart as demand for the safety of British government assets surged, dragging yields to their lowest on record. A report this morning also showed that foreign investors, in this case Japanese investors, have purchased more gilts than bunds in 2012 highlighting the British asset's role as a safe-haven. However, the GBP's role as safe-haven pales in comparison to that of the USD and as such the pound pushed to its lowest levels against the dollar in nearly a month.
The JPY is weaker against the dollar this morning, as investors are increasingly unwilling to enter long yen positions at such elevated levels. There has been increased 'chatter' that the BoJ is eyeing another round of intervention should the yen make a convincing break below 77, but no action has yet been taken. Nevertheless, the psychological effects are pervasive and as such investors have turned to the dollar as the primary safety currency.
The Commodity Currencies were hit the hardest by the evaporating confidence and as raw goods slip into the red. Oil fell to $96/bbl, gold was down to $1685/oz and copper fell to $325/lb as global growth prospects quickly dim. The CAD fell to a fresh six week low against the USD as investors turned away from higher-yielding growth-sensitive currencies. The falling price of oil, Canada's main export, has also weighed on the loonie throughout the week. The AUD and NZD are both lower this morning by 1.5% and 1% respectively as risk aversion drives investors out of the high-yielding, but relatively risky currencies. The ZAR fell yet again overnight, slipping to a 2½ year low against the USD on concerns that the Eurozone, the main destination for South African exports, is quickly slipping back into recession.
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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.