• USD stronger against most major currencies
  • EUR at a year-low after release of weak economic data
  • JPY uncertainty remains as new BoJ board transitions in


USD – The USD strengthened against most of its major counterparts, rising to a six month-high after the release of disappointing economic data overseas.  Consumer spending rose 0.2% in January as Americans spent more on utilities during the cold months.  The ISM index of national factory activity rose to 54.2 in February as factory activities grew at its fastest pace since June 2011.  The ISM data suggests that manufacturing will continue to support US economic growth, even though consumer spending is expected to pull back sharply this quarter due to higher taxes.  While the dollar index is at a yearly-high, improving on growth differential prospects, investors remain concerned that fiscal uncertainty will potentially weigh-in on the economy through the sequestration plan.  The plan, known as “sequestration”, will initiate time-released, federal cuts across the board of $85B starting today, which could slow US economic growth.  The inflexible plan can be halted if there is an agreement between Congress and the White House.  President Obama met with Republican and Democratic congressional leaders today in search of an alternative fiscal plan. 

EUR – The euro weakened against the dollar, falling to its lowest level of the year as weak euro zone data leaves market participants to favor the dollar as a safe haven.  The euro zone inflation rate fell 1.8% in February, pushing up borrowing costs for struggling countries.  The cooling inflation along with the risks of political instability in Italy adds pressure to the ECB to consider lowering interest rates in the coming months, which would continue to keep the euro weak against the dollar.  The Eurozone’s unemployment rate in January rose to a record high of 11.9%, suggesting that wage growth is set to weaken from its already low rates of around 2.5%.  Manufacturing activity was also sluggish in February at 47.9 from its previous reading of 47.9.  Expect the euro to continue to weaken against the dollar, as high unemployment rates, low economic growth, and rising debt levels pushes investors to seek safety in the dollar.  Market participants await the ECB’s decision on a potential rate cut next Thursday, which will be a key driver for the EUR.

GBP – Sterling dropped after weak manufacturing data and heightened monetary easing expectations, falling below 1.500, the first since July 2010.  So far this year, sterling has lost over 7% against the US dollar in addition to the downgrade of Britain’s triple-A rating by Moody’s last week.  The sterling is holding above 1.500 for now, however analysts say it could remain weak given the UK’s more flexible approach to inflation targeting and a subsequent rise in inflation expectations.

JPY – The Japanese yen weakened vs. the US dollar while Japan’s industrial production rose for the second straight month in January in a sign that Japan may be emerging from a mild recession.  A rate review is expected to occur with BoJ Governor Shirakawa and his 2 deputies prior to their leaving office, on March 19th, followed by fresh stimulus measures when new members of the BOJ Board have their first official meeting on April 3-4.  A confirmation hearing takes place on Monday for the new nominee, Haruhiko Kuroda, an advocate of unconventional monetary steps.  Government assessment of the economy and corporate sentiment remains positive due to the falling yen and rising share prices. The yen trades in the 93 ranges.

Commodity Currencies – The commodity currencies are weak against the dollar after the release of weak domestic data in Australia and Canada.  The CAD weakened against the USD, touching an 8-month low, after the jobless rate dropped to 7%.  Canada’s economy unexpectedly shed 21,900 jobs in January, while housing starts fell steeply in January to 160,577 units from 197,118 in December, leading to a contraction in Canada’s economic growth in the first quarter of 2013.  Along with higher unemployment and lower housing starts, weak prices for Canadian oil also hampered the currency.  Market participants expect the CAD to remain in its recent ranges against the dollar until the BoC meeting on March 6 to discuss a possibility of increasing interest rates.  The AUD fell against the USD even though key manufacturing data in China met forecasts and supported expectations that China’s economy was recovering.  However, political uncertainty in Italy and impending US government spending cuts, lowered demand for Australian commodities.  Expect the AUD to remain in its current ranges until the release of its GDP data next Tuesday.

For more market reports go to Union Bank of California