v S&P puts 15 Eurozone nations, including AAA rated Germany and France, on watch for a downgrading of their sovereign credit rating;
v Merkel and Sarkozy said to be preparing a number of proposed amendments to EU treaties to build fiscal solidarity within the bloc;
v USD remains well supported as the primary proxy for market risk sentiment.
The US Dollar is mixed this morning as investors' collective focus shifts back to the Eurozone after S&P put 15 of the region's member states on watch for a credit rating downgrade. The development comes days before European leaders are set to unveil a comprehensive plan for increased fiscal integration and consolidation within the EU. Meanwhile, with no major economic data due out of the US, the dollar remains rather well supported against many of its major counterparts after yesterday's disappointing ISM and factory order data suggest that the US economy is slowing. However, the dollar's gains have been limited by investor need for diversification. A report from an independent research institute released this morning showed that China continues to diversify its new holdings of foreign currencies, primarily USD, into other currencies and assets including the EUR. Nevertheless, with investor risk appetite remaining tepid at best, the dollar will likely remain well supported ahead of this Friday's EU leaders summit, albeit within its recent ranges.
The EUR is modestly lower this morning after yesterday's surprise announcement from S&P, putting only more pressure on regional policymakers. German Chancellor Merkel and French President Sarkozy are said to be preparing a number of amendments to the EU's main treaties that will allow for further fiscal integration within the EU, and ultimately pave the way for the issuance of Eurobonds. Despite these positive steps, S&P's warning shot appears to be focused on the growing inevitability of recession throughout the region. As the Eurozone's peripheral economies begin to get their fiscal houses in order, the pinch of austerity is weighing on consumer spending, and in turn the export-led economies of nations such as Germany. While fiscally responsible government spending is a must, cuts could result in a severe slowdown in economic growth. Nevertheless, the common currency remains relatively well entrenched within its recent ranges as the number of credible alternatives remains limited. With the SNB and BoJ actively intervening to prevent their currencies from strengthening too far, the USD, GBP and a handful of other G10 currencies do not provide enough options for investors to exit long EUR positions while remaining diversified.
Sterling is also lower this morning after S&P's announcement has investors worried that the UK's AAA credit rating may also soon come into question. However, British policymakers have been comparatively proactive in reducing deficit spending. The austerity has however had a negative impact on consumer demand within the UK as reflected in declining home prices as bank's extended less mortgages last month.
The JPY is marginally higher against its major counterparts this morning as investors turn to its relative safety. With all eyes on the Eurozone, the yen will likely continue to gradually strengthen until a credible plan to backstop Europe's fledgling economies is unveiled. However, as the yen moves closer to the 77 handle, the odds of BoJ intervention increases greatly.
The Commodity Currencies are mixed this morning with both the CAD and ZAR gaining while the AUD and NZD are lower. Raw goods are generally lower with oil falling back towards $100/bbl, gold down to $1709/oz and copper slipping to $356/lb. The CAD is higher this morning despite the declining price of oil, Canada's main export, after the BoC kept interest rates on hold, but focused on stronger than expected economic growth both in North America. In contrast, the RBA cut interest rates by a quarter of a percent for the second month in a row to 4.25%. The cut was widely expected, but the Bank's dovish commentary left the door open for further easing in the coming months.
CHANGE FROM CLOSE
10-Year Treasury Yield:
This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.