• USD and Yen stronger as tensions in Egypt increase risk aversion

  • EUR faces pressure over  peripheral country concerns

  • Commodity currencies weaken as oil prices break $100

USD – The dollar held strong against the euro and weakened against the yen after data showed U.S. initial weekly jobless claims fell for a second straight week, suggesting a stabilizing labor sector. Initial claims fell by 5,000 to a seasonally adjusted 343,000, the Labor Department reported. Also assisting the dollar and the yen was an increase in risk aversion and a flight to safe haven currencies due to rising tensions in Egypt, where President Morsi does not appear to be offering his resignation and tensions are expected to rise. Look for thin trading today ahead of the July 4th holiday tomorrow. Friday, the market will focus on Non-Farm Payrolls, where some analysts expect the economy added 165,000 jobs in June. If the jobs number beats analysts’ expectations, look for the dollar to rally along with market expectations that the Fed will start scaling back stimulus.

EUR – The euro recovered close to recent levels after posting a fresh one month low as Portugal takes center stage. Yesterday Portugal’s foreign affairs minister Paulo Portas resigned followed by Finance Minister Vitor Gaspa. The move pushed Portugal’s 10 year bond yield to a fresh ytd high of 8.0% and fueled speculation that the country will fail to meet its bailout conditions. Italy and Spain’s bond markets were also up 4.5% and 4.75% respectively, while Greek yields were up to 11.1%. Analysts will look towards tomorrow’s ECB meeting for further clues about the EU economy where ECB head Mario Draghi may address these peripheral country concerns and may stress the need for additional stimulus. Look for the euro to hold close to current levels, but potentially further weaken with pressure growing in Portugal, Italy and Spain.  

GBP – Sterling pushed higher on the heels of the better-than-expected PMI figures out of the UK. The Purchasing Managers Index (PMI) survey climbed to 56.9 in June from 54.9, more than two points above the consensus forecast.  Also the composite activity index, which includes services and manufacturing showed economic growth of at least 0.5 percent in the second quarter. The figures may indicate that the UK’s economy is faring much better than many economists had thought and is good news for the new central bank governor, Mark Carney. With this positive data out the chances that the BOE will raise its 375 billion pounds in asset purchases further diminishes. Look for sterling to hold close to current ranges as Carney chairs his first Monetary Policy Committee meeting this week with some market analysts looking to potentially revise their sterling forecasts. 

JPY – The yen is stronger climbing nearly 0.9% and pushing the currency pair back below the key psychological level of 100 on the interbank market. The move stems from risk aversion with growing geopolitical tensions in Egypt. Look for USD/JPY to remain well supported above the 50‐day moving average of 99.22 on the interbank market. 

Commodity Currencies – Commodity currencies are under pressure as turmoil in Egypt sends the price of oil over $100 a barrel and investors towards safe-haven assets. As such, the AUD fell to its lowest point since September 2010, as markets expect an over 50% chance a cut in interest rates will be announced next month. The RBA has slashed its cash rate by a total of 200 basis points since late 2011. Its latest move was in May. Meanwhile, the plunging CAD halted losses against the USD and traded flat, as market players avoided large positions ahead of the July 4th holiday and key jobs data due on Friday. Domestically, Statistics Canada showed a smaller than expected Canadian trade deficit in May, which shrank by almost 70% in May from April due to falling imports. Exports to the United States, which encompass 74.2% of all Canadian exports in May, fell 1.6%, while imports dropped by 2.0% - the first such decline in five months. Uneven Canadian economic data has investors continuing to wonder how soon the BoC will act on the threat of raising interest rates.