• USD weak after lower than expected manufacturing data.

• EUR strengthens inflation data came in as expected.

• GBP strengthens after BoE chief comments on the currency.

USD – The USD weakened against most of its major counterparts as softer than expected New York State manufacturing data prompted some profit-taking on the dollar’s recent rally.  The NY State manufacturing data expanded for a second straight month in March, though the pace of growth cooled slightly and a measure of new orders fell.  The general business conditions index slipped to 9.24 from 10.04 in February.  New orders fell to 8.18 from 13.31, while shipments dropped to 7.76 from 13.08.  Employment data points to a sluggish labor market as the index for the number of employees fell to 3.23 from 8.08.  The US Core CPI data showed the biggest increase in consumer prices in nearly four years last month, up 2%, as the cost of gasoline surged.  However, consumer sentiment weakened in March, according to the University of Michigan’s US Consumer sentiment survey, which came in at 71.8 compared with 77.6 in the previous month.  US consumer sentiment fell to its lowest since December 2011, as Americans were dissatisfied with government economic policies, and as fewer Americans expected improvements in growth or the labor markets.  The next key event will be next week when policymakers at the central bank assess the economy.  Market participants widely expect the Fed to keep purchasing $85B in bonds per month to spur even stronger economic growth, until they see a substantial improvement in the labor market conditions.

EUR – The EUR strengthened against the USD as inflation pressures eased in the Eurozone, giving governments and central bankers more room for stimulus to shift their focus on reviving economic growth.  Eurozone inflation data came in at 1.8%, which was close to the ECB’s target.  Modest wage growth and a cooling of food price pressures were also factors that drove annual euro zone inflation down to 1.8% in February, its lowest level since mid-2010. Hourly labor costs in the Eurozone rose 1.3% overall in the last three months of 2012, and wages per hour grew by 1.4%.  Market participants expect the EUR to remain in the 1.3050-1.3103 levels until the ECB decides whether or not to cut interest rates.

GBP – The GBP strengthened against the USD, hitting a 10-day high after BoE chief Mervyn King surprised investors by saying the currency’s decline had gone far enough.  King said that the central bank was not seeking any further fall in the level of sterling, which now appeared to be “properly valued”.  However, the sterling could struggle to continue on gains given persistent concerns about the economic outlook and expectations the bank may have to resort to more asset purchases.  The GBP should remain in its recent weekly ranges until the release of economic data next week.

JPY – The Japanese yen strengthened versus the USD, but expected to remain weak on the prospect of aggressive monetary easing in Japan. Analysts say, with the newly approved BoJ governor, Haruhiko Kuroda and two deputy governor posts, the yen range could be 86-96, or in the 95-105 range if the BOJ disappoints.  Kuroda pledges to “act with speed” and commits to do what it takes to hit the BoJ’s inflation new target sought by Prime Minister Shinzo’s economic revival plan. The yen is currently trading at the 95 handles.

Commodity currencies – The CAD strengthened to its strongest level against the USD in three weeks, as US manufacturing data came in below expectations and a broader USD selloff.  However, the CAD’s gains were trimmed after data that showed sales of existing homes in Canada fell in February from January and year-over-year sales plummeted.  The decline in home sales shows more evidence that the country’s housing market is slowing.  Market participants expect the CAD to trade at the 1.0210 level until the release of the retail and manufacturing sales data due next week.  The AUD strengthened against the USD, breaking its 200 day moving average prompting investors to be bullish on the currency.  The market expects the AUD to continue pressing above the 1.0380 level going into the weekend.

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