EUR gained after the ECB decided to keep rates on hold at a historic low of 0.75%.
Commodity currencies were lower after investors took gains from yesterday’s “risk-on” sentiment.
USD – The USD was mixed against most major currencies after the US trade deficit unexpectedly widened to inventory buildup in November, reflecting the stock-up of imported goods by American retailers for the holiday season. The gap jumped 15.8% to $48.7bn, exceeding the $41.3bn poll, forecasted by a Reuters survey of economists. In addition, prices declined for US imports and exports in December, a sign that global exporters are hurting, giving respite to US importers hit by higher fuel prices. In addition, prices fell for exported capital goods and consumers goods as US manufacturers selling their goods abroad appear to have declining power in pricing as the global economy takes a hit from the European debt crisis. Overall, prices for imports fell by 0.1% while the prices for exports dropped 0.2%. This points to a tame inflation environment that should allow the Federal Reserve to stay on its ultra-easy monetary policy course as it tries to nurse the economy back to health.
EUR – The euro gained as much as 0.5% against the USD after a Goldman Sachs strategist wrote in a note that the currency may rise to 1.3700 against the dollar. ECB President Draghi said the Eurozone economy will slowly return to health in 2013 and offered no hints to when the next ECB cut rate might be. In the latest meeting, the Governing Council decided to keep rates on hold at an historic low of 0.75%. The cooled expectation of a rate cut and Draghi’s positive statements pushed the euro higher across the board.
GBP – Sterling fell against the dollar after weak UK industrial output in November added to a grim outlook for the British economy. Consumer spending and output in the UK have stagnated, implying a growing amount of spare capacity in the economy. The latest industrial data holds to that trend and solidifies the expectation the UK could face further contraction and need more monetary stimulus. The BoE kept its main interest rate at a record low of 0.5% and said it would not buy any government bonds on top of the 375bn pounds purchased so far. Traders expect the pound to trade in a $1.60 to $1.62 intraday and gains in the near term will likely be capped as the UK is expected to struggle even further given its biggest trading partner the Eurozone could go through a recession in the first half of the year. Moreover, there is a risk the pound may slip further as the UK could lose its prized triple-A rating if growth continues to underperform and the government fails to hit its debt reduction targets.
JPY – The yen dropped to its weakest level since June 2010 against the dollar after the Japanese government’s statement to spend 10.3 trn yen (about $117bn) in new stimulus measures, the biggest push yet since the financial crisis. Prime Minister Abe’s recipe to bounce Japan back from years of deflation includes doubling inflationary target to 2%, increasing government debt and asset purchases, as well as increasing job growth by 600,000 as part of the BoJ’s mandate. Abe's call for bolder BoJ easing has weakened the yen 0.2%, reaching USD/JPY 89.35 in intraday trading.
Commodity Currencies– The Canadian dollar weakened against the USD, as the Canadian trade deficit unexpectedly rose to $1.96bn in November from $552mn in October. Statistics Canada reported that imports rose 2.7% on the increased shipments of electrical equipment, while exports fell 0.9% on the lower demand for agricultural and mineral products. The widening trade deficit added pressure on the CAD. The AUD weakened against the USD after investors captured gains from yesterday’s release of improved economic data from China. Despite this morning's sell-off in the AUD, the currency continues to remain in the upper ranges of 1.0600. The MXN also weakened against the USD after a recent rally in the 12.6400 range. Mexico’s November industrial production data rose 2.8% on gains in manufacturing, mining, and utilities. Mexico’s CPI decreased below 4% for the first time in 7 months, further diminishing the possibility of an interest rate hike in the near future. Expect the MXN to trade on the lower end of its weekly range over the weekend, as investors await the Mexican central bank’s decision on interest rates next week.
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