USD broadly weakened as uncertainty over tapering lingers
EUR strengthened on better-than-expected German industrial output data
AUD surged on encouraging Chinese trade data
USD – The US dollar slid further overnight to reach a seven-week low against a basket of currencies as comments from Fed policymakers raised doubts over when the US central bank will begin to reduce the current stimulus package. As such, the dollar index fell 0.2%, hitting its lowest levels since mid-June. It has lost 4% since hitting a three-year high a month ago. Some Fed policymakers have suggested this week the central bank could scale back as soon as September, but this will depend on a further improvement in the jobs market. Although most analysts expect the dollar to resume gains towards the end of the year, uncertainty about when the Fed may reduce its $85 billion per month bond buying program has kept the currency under pressure. Domestically, the number of Americans filing new claims for jobless benefits rose slightly last week but remained at levels last seen before the 2007-09 recession. Initial claims for unemployment benefits rose by 5,000 last week to 333,000, while economists had expected a rise to 336,000 last week, which is a good sign for US employment. However, the four-week average, which often gives a clearer reading of the labor market's underlying health, fell to its lowest since November 2007. The labor market is being closely watched by the Federal Reserve, which is expected to reduce its bond purchases as soon as its next meeting in September.
EUR – The Euro inched closer to hitting a two-month high today and is currently testing the 1.3400 levels amid strong economic data from Germany, Europe’s largest economy. Germany’s industrial output rebounded in June, surging 2.4% and easily beating consensus estimates of a 0.3% gain. This is the strongest rise in output since July of 2011, perhaps signaling that the manufacturing sector is powering growth in Germany. In addition, Fitch rating agency confirmed Germany’s AAA debt rating, another positive sign for the Eurozone. The lone weak spot came from disappointing export data as exports rose just 0.6%. The ECB also released its monthly bulletin early this morning, reiterating past sentiments about the state of the Eurozone, but also lowering economic growth forecasts for 2013 and 2014. Economic contraction estimates for 2013 rose to 0.6% from 0.4%, and economic expansion predictions dropped to 0.9% from 1%. Despite these bearish revisions to GDP numbers, the ECB stated it sees an imminent recovery in the Eurozone and the new data did little to change the market’s overall perception of monetary policy, and therefore did not significantly affect the single currency.
GBP – Sterling was firmer against the dollar, reaching 1-1/2 month highs, on expectations that an improving UK economy could prompt the central bank to tighten policy sooner rather than later. A slew of positive data, including better-than-expected services sector activity, has indicated the UK's recovery is on solid footing and businesses could start hiring at a steady pace in coming months. Meanwhile, sterling rose 0.2% from yesterday’s close after the outlook on monetary policy from the BoE yesterday prompted investors to accelerate the expectations of when interest rates will rise.
JPY – The yen maintained its climb against the dollar and strengthened to reach a seven-week high in this morning’s trading. The yen showed little reaction after the BoJ kept its policy on hold and held off from revising up its assessment on the economy. As widely expected, the BOJ voted unanimously to maintain its pledge of increasing cash and deposits at the central bank. Meanwhile, BOJ board member Takahide Kiuchi proposed that the central bank make its 2% inflation target a long-term goal rather than a medium-term, and commit to however much stimulus is necessary for the next two years. This has extended the BOJ's current commitment to reach its inflation target in roughly two years, adding rhetoric to minimize recent yen gains against the dollar in recent weeks.
Commodity Currencies – Higher yielding currencies and commodity-linked currencies, such as the Australian dollar, captured gains vs. the greenback on better-than-forecasted Chinese trade data, which may indicate that the world's second-largest economy was stabilizing after more than two years of slowing growth. As such, the AUD rose 0.9% after China's exports in July rose 5.1% from a year earlier, while imports leaped 10.9%, leaving the country with a trade surplus of $17.8 billion for the month. The report alleviated fears of a sharp slowdown in the Asian giant, Australia's key export market, and leaves the Aussie with a gain of 1.7% so far this week. Meanwhile, the Canadian dollar strengthened from yesterday’s close that reached one-month lows, which came on the back of weaker-than-expected data out of Canada. Building permits were down 10.3% m/m and the Ivey PMI fell to 48.4. Look for CAD to potentially strengthen further on technical movement with the currency crossing above the 21‐day moving average.
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