v USD pares recent gains as risk aversion wanes; import prices gain 1.3% month/month suggesting inflationary pressure may again be emerging;
v EUR rebounds within its recent ranges as yields on both Spanish and Italian debt pull back from recent highs; ECB comments suggest that the Bank may maintain their proactive stance with further rounds of monetary easing;
v JPY pulled back from yesterday's highs as demand for the yen's relative safety wanes.
The USD pared its gains overnight as the risk-off trade subsides. Financial markets bounced back this morning after stocks suffered their worst losses of 2012 on Tuesday. Investors are also breathing a momentary sigh of relief as yields on government bonds retreat in both Spain and Italy as the Eurozone debt fears ease. Meanwhile, import prices gained by more than expected, reducing the prospects of further Fed easing as inflation ticks higher. Moreover, Atlanta Fed President Dennis Lockhart told reporters this morning that while the weak NFP report last Friday was disappointing, it doesn't alter his view that the US economy is in fact growing. He went on to say that he would be reticent to support additional asset purchases or monetary easing. I am still not convinced that another round in this time frame would achieve a great deal. Nevertheless, the USD remains supported within its recent ranges against most of its major counterparts as investors remain wary that the Eurozone situation is improving.
The EUR has rebounded from Tuesday's fall and has gained to a four session high against the USD. Yesterday's weakness was largely caused by rising Spanish bond yields and broader market flight to safety. However, the euro gained some relief after German 2-year yields fell below Japanese 2-year yields this morning, a significant event reflecting a fundamental shift where European debt markets, albeit only Germany's, are attracting risk aversion flows. Gains have also been attributed to comments from ECB Executive Board member Benoit Coeure stating that further Bank bond-buying remained an option, hinting the ECB will extend its aggressive monetary policy. Despite today's climb, the common currency remains vulnerable as the recent rise in Spanish and Italian bond yields remains a cause for concern.
The GBP is higher this morning against both the USD and EUR as risk aversion wanes. With no data out of the UK to suggest otherwise, investors have taken the sterling's recent declines as an opportunity to enter long positions. A private industry report showed this morning that British retail sales outpaced expectations at 1.3% versus a 0.3% decline in the previous reading. While the British economy continues to struggle, recent reports suggest that a modest upturn may be under way. As such, the GBP will benefit in times of risk-on.
The JPY has pared some of its recent gains this morning as both stocks and commodities rebound, sapping demand for the safe-haven yen. Machine orders data released overnight has also encouraged investors with orders jumping 4.8% versus last month, extending the annualized gain to 8.9%. Finance Minister Azumi told reporters this morning that he sees signs of improving economic fundamentals in Japan, giving investors reason to believe the BoJ may not change monetary policy at their meeting on the 27th.
The Commodity Currencies are slightly higher this morning as rebounding equities and commodities provide support, but investors remain unwilling to assume riskier positions en masse. Raw goods are mixed with crude gaining to $102/bb, gold flat at $1659/oz, and copper falling to $364/lb. The CAD rebounded from its lowest level since January this morning as investors increase bets that the BoC may signal that economic conditions have improved when it concludes a meeting on monetary policy next week. The AUD declined sharply in overnight trading, reaching three-month lows, before bouncing back as investors tepidly sought higher yields. Similarly, the NZD reversed overnight losses as equities in China, Australia and New Zealand's main export partner, moved into the black. The MXN remains under pressure this morning after weakening above the key 13.00 level for the first time since late January with expectations growing that the Mexican central bank may ease monetary policy in the months ahead.
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