USD is broadly lower post Bernanke’s 2-day testimony to congress
JPY is higher against the USD ahead of Japan’s upper house election
Commodity Currencies are stronger as China makes effort to boost domestic economy
USD – The US dollar is slightly weaker against most majors after two days of testimony in Congress by US Fed chair Ben Bernanke. Despite this highly observed event, markets were little changed as Bernanke did not really add anything new in his remarks, reiterating the Fed’s bond-purchase program and adding that any decision made on scaling back QE as early as September would be based on economic data. However, the dollar took some reprieve after Moody’s Investment Services gave a positive ratings outlook for the US late yesterday. The ratings agency raised the US sovereign outlook to stable from negative and affirmed the country’s AAA rating, citing steady growth and a reduced federal deficit. According to the Treasury department, in the first eight months of the budget year, the deficit totaled only $509.8 billion, which was nearly $400 billion lower than the same period last year. Using the difference between what the government collects in taxes and what it spends, the US government is on track to report its lowest annual deficit in five years. In addition, S&P ratings agency upgraded its outlook for long-term US government debt last month but kept its rating at AA+, a notch below its top grade. Despite the economy’s moderate growth, in comparison to its other peers, the US has demonstrated a high degree of resilience toward a weakened global demand and has managed to reduce government spending.
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EUR – The euro strengthened against the dollar, up 0.23% from yesterday’s close, despite geopolitical woes in the area and warnings from the IMF. Political uncertainties continue in the Eurozone as the party coalition in Italy undergoes increasing pressure while the senate holds a no‐conﬁdence vote and Silvio Berlusconi’s appeal continues. In other news, the IMF made warnings to the G20 about market turbulence that may worsen as global growth could be lower than projected due to a prolonged period of stagnation in the Eurozone area, whilst the emerging markets face increased risks of a slowdown. In all, EUR/USD is up 0.59% from the start of the week and is expected to trade within ranges ahead of consumer confidence and flash PMI data in the Eurozone due mid next week.
GBP – Sterling climbed higher against the dollar, converging with its 100-day moving average and the highest in nearly 3-weeks. This week’s BoE minutes and recent data releases suggest the grounds for a less dovish BoE. This will have material impacts on GBP’s outlook as the market continues to adjust its outlook, helping support gains in the currency.
JPY – The Japanese yen strengthened against the US dollar ahead of Japan’s upper house elections, which may allow momentum to PM Abe’s aggressive economic reform. Polls show that PM Abe’s ruling Liberal Democratic Party and its New Komeito Party coalition partner are on track to take the majority win. This would give more freedom for Abe to push his plans of monetary easing, public spending and structural reform which can lead to pressure on the yen. Strategists believe that with the focus of the BoJ to beat deflation over the next two years by doubling its balance sheet by the end of 2014, expectations of a vulnerable yen remain and any gains in the yen would be temporary.
Commodity currencies – The Canadian dollar slightly gained against the greenback as Canada's annual inflation rate rose in June for the second straight month to 1.2% after hitting a 3-1/2-year low in April, but price pressures remained muted as the central bank signaled an extended pause on interest rates. The AUD posted slight gains and the NZD drove up 0.61%, reaching its highest level in 1-month against the USD. Some support was handed to the AUD as China's central bank stepped up to boost their economy, stating that it will scrap all controls on lending interest rates and let financial institutions set rates themselves. The move, planned to be in effect tomorrow, a key step in plans for liberalizing the country's interest rate regime, will help reduce financing costs of domestic companies and improve the structure of China’s real economy.
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