• GBP slips to near 3-year lows vs. USD on the back of dismal manufacturing data
• Rally in U.S. equities pauses, but positive trend seems stable
• JPY recovers from 3 ½ year low against USD on profit taking move
USD – The US dollar took a breather today against most major currencies despite the record-breaking rally in U.S. stock market which paused today after a seven-session string of gains. Investors' confidence in equities has grown, leading the Dow to gain more than 10 percent and the S&P 500 to rise more than 9 percent so far this year. An improving economy and the Federal Reserve's quantitative easing also have helped drive the gains. The backdrop of optimism on the U.S. economy has supported the USD over the past week, with the stock markets closing at a record high yesterday, while Wall Street's "fear gauge", the CBOE Volatility Index, hit its lowest since February 2007. Some analysts believe that this may be the start of a long-term strengthening trend for the USD. The stock market gains and above-forecast U.S. jobs growth revealed in data on Friday lifted yields on U.S. Treasuries, which tend to have strong positive correlation with strong dollar movements as higher yields are thought to attract more bond investments.
EUR – The single currency was little changed overnight, holding above Friday's three-month low of $1.2955. For the near term, markets expect the euro to hover around the 1.30 level given large option barriers at this level. Looking forward, the euro is seen vulnerable to more selling as the austerity-hit euro zone's economy is expected to face an uphill battle to recover from recession. Some investors still anticipate the ECB to cut rates. In support of this belief, the head of the IMF said that stronger economies such as Germany should allow for higher inflation and wage growth, adding to reasons why the ECB should cut interest rates further - a move that will add more downward pressure on the currency.
Markets focus will remain on Greece amid negotiations over the next bailout installment due this month, which is contingent upon further public Sector layoffs.
GBP – Sterling plummeted following the release of dismal British manufacturing data which revived fears of another recession and increased bets of more near term easing by the Bank of England. UK manufacturing output unexpectedly fell in January, signaling a poor start to the year for the British economy. Rising speculation that the BoE would be compelled to print more money to support the faltering economy stood in contrast to the United States, where a string of better data has supported the view the Federal Reserve may scale back its asset purchase program later this year. The pound has been one of the worst-performing major currencies in 2013, falling 8.3 percent against the dollar and around 7 percent against the euro. With the likelihood of additional asset purchases the sterling could suffer additional losses.
JPY – The JPY rebounded from last week’s 3 ½-year low against the US dollar, as investors booked profits on the back of today’s comments from Bank of Japan gubernatorial nominee, Haruhiko Kuroda. He hinted that he may launch new monetary easing steps, soon after he takes office next week, rather than wait for his first policy meeting on April 3-4. The yen remains under pressure awaiting April’s BOJ policy meeting. It is widely believed that the BoJ could embark on more aggressive monetary stimulus sooner than previously thought, keeping any sharp rebound in the yen in check.
Commodity Currencies – The Canadian dollar was little changed against its U.S. counterpart today, with the week's lack of domestic data expected to keep it to a tight range, even as it made significant moves against the British and Australian currencies. The Australian dollar rose to a 2-week high against the USD, helped by a recent improvement in risk appetite by U.S. investors. The New Zealand dollar fell on comments from Finance Minister English regarding the country’s dairy industry and the outlook for growth.