• USD rallied after better-than-expected US economic data

  • EUR fell sharply against USD after dovish comments from ECB President Draghi

  • Commodity currencies weakened despite higher US equities and oil prices


USD – The US dollar rallied against most major currencies after a slew of positive US economic headlines were released this morning following the closely observed Fed announcement yesterday that left investors undecided in taking large positions. Meanwhile, US equities reached record highs from yesterday’s close as the S&P rose 1.01% and the DJI climbed 0.85%. In the news, ISM factory data for July beat expectations, reporting at 55.4 (the highest since June 2011) vs. a prior 50.9. New orders index surged 58.3 vs. 57.8 while factory employment reported 54.4 vs. 48.7. Meanwhile, the Labor Department reported initial claims for unemployment benefits dropped 19,000 to a seasonally adjusted 326,000, the lowest since January 2008. Americans filing new claims unexpectedly fell last week, touching a 5-1/2 year low, suggesting a steadily improving labor market. The labor market is being closely watched by the Federal Reserve, who yesterday offered no indication on reducing its monthly $85 billion dollar bond purchases scheduled to be announced in their next meeting in September.

EUR – The euro fell against the broadly stronger dollar, reaching its weakest level in three weeks, after ECB President Mario Draghi affirmed that interest rates in the Eurozone will remain low for an extended period. In a press briefing after the ECB left rates unchanged, Draghi said the risks to growth in the region are tilted to the downside, warranting a loose monetary policy. The ECB left its main interest rate unchanged at a record low of 0.5% today as recent economic data kindled a glimmer of hope for a recovery this quarter. However, markets responded to the dovish comments made from Draghi, which sent the euro spiraling downward since the release. Policymakers have also stated that labor market conditions remain weak and growth in the euro area will depend on the gradual recovery in global demand. However, Draghi added that "overall, euro area economic activity should stabilize and recover at a slow pace.”

GBP – The pound weakened today after the BoE’s monetary policy meeting where, as expected, the bank kept interest rates at .5% and left its £375bn asset purchase program unchanged. Also released today was the UK Purchasing Manager’s Index for the month of July. The PMI rose for the fifth straight month to hit 54.6, a new two-year high, beating expectations of 52.8. While many hope such encouraging PMI data will translate into stronger GDP growth, the BoE will most likely wait and see if a broader economic recovery ensues before making any substantial changes to its stimulus measures.

JPY – The yen plunged today, down 1.4% vs. the dollar and is approaching the key technical level of 100. A Nikkei Index rally (up 2.5%) in conjunction with strong US economic data releases has put downward pressure on the yen. Some analysts expect the yen to continue to weaken, as the Fed remains focused on an eventual tapering of its quantitative easing program, while the BoJ is committed to maintaining its loose monetary policies well into the foreseeable future.  

Commodity Currencies – The Canadian dollar weakened against the US dollar as stocks and oil prices pushed higher. With little data out of Canada, look for the loonie to track US data with the non-farm payroll figure due out tomorrow. The CAD should remain well supported above the recent interbank low of 1.0253. The Australian dollar held close to three-year lows after hitting its lowest level since 2010. The Aussie, however, was able to find support after the release of better than expected Chinese manufacturing data that rose to 50.3 from 50.1 last month. The positive manufacturing reading helped ease some concerns with Australia, China’s key importer of goods. The Aussie has lost more than 3% this week following dovish comments from RBA Governor Glenn Stevens earlier in the week, where he indicated that the Aussie could fall to the 87 cents level, especially given that rates are expected to fall to a record low of 2.50% at RBA’s meeting next Tuesday. The New Zealand dollar weakened slightly against the dollar on the heels of Aussie weakness. Near-term support for the kiwi is seen at the 20-day moving average at $0.7908, with $0.8000 capping the topside.

For more market reports go to Union Bank of California