v USD gains against all of its major counterparts on increased risk aversion;
v EUR continues its decline as member nations' government bond yields rise; Irish parliament considers referendum on newly proposed EU treaty;
v Commodity Currencies are hard hit by declining risk appetite and slowing global growth.
The rally in the USD gained momentum overnight with the dollar index gaining nearly 0.5% as resurgent debt concerns in the Eurozone prompt investors to seek the dollar's relative safety. Despite last week's strong steps towards addressing the crisis, investors appear to view the EU's actions as too little too late. Meanwhile, the US economy continues to prove its resilience with the improved growth in the second half of the year keeping the Fed on the sidelines at their monetary policy meeting yesterday. The Fed's outlook for contained inflation was also reaffirmed this morning with the import price index expanding by less than expected, reflecting lower costs for metals and foods in particular. Nevertheless, on an annualized basis, prices of imported goods were still 9.9% higher in November, but that is below the 11% registered in the twelve months ending in October. However, with the EU nations clearly headed towards recession, the slowing global economy has weighed on investor risk appetite.
The EUR continued its decline this morning, slipping below the key 1.30 handle for the first time since January as last week's optimism appears to be quickly receding. The yield on government bonds in the Eurozone nations are again rising despite increased ECB activity. The yield on Italian 30-Yr yields again breached the 7% level, and while costs on shorter dated securities remain off last month's highs, momentum is clearly to the upside. Meanwhile, last week's newly proposed treaty that would build fiscal unity amongst the EU members with the exception of the UK, is being questioned by some of the regions smaller economies. The Irish parliament may soon take up the matter with a possible referendum vote on the horizon. As Ireland's Finance Minister put it, any referendum on the new EU accord may effectively be a vote on Ireland's continued euro membership. With confidence in the region deteriorating, the common currency has come under significant pressure, but its downside remains limited with there being few viable alternative currencies. In years past, a decline in the EUR resulted into capital flows into not only the USD, but also the CHF and JPY in particular. The SNB and BoJ's more proactive stances have since limited those flows, and with a need to maintain diversification, investors are unable to shift all EUR holdings into the USD. While the common currency's decline will continue with its existence again coming into question, the capital outflows will likely not be as pronounced as they may have been several years ago.
Sterling is once again mixed this morning, falling against the USD, while gaining against the EUR for a third straight day. The pound gained against its mainland European counterpart as demand for British government assets remains high, and after British jobless claims unexpectedly declined. The unemployment rate remained constant at 8.3%, but a declining claimant count suggests that the labor market may improve in the coming months. The GBP has remained under pressure against the USD this week as investors begin to price in further quantitative easing measures as slowing inflation gives the BoE more room to stimulate the fledgling British economy.
The JPY is slightly lower this morning against the USD while heading towards an all-time best against the EUR. The yen retains its status as a safe-haven currency, yet the threat of further rounds of BoJ intervention has limited that appeal to some degree, with the USD being the main benefactor. Nevertheless, the EURJPY rate is likely to break below the 101 handle in the near term, testing the all-time low of 100.97 reached in early October.
The Commodity Currencies extended their recent declines this morning as risk aversion prompts investors to shift capital out of higher-yielding, but riskier assets. Raw goods also begin the day in the red with oil tumbling 4% to $96/bbl, gold breaching the $1600/oz level, and copper slipping to $329/lb. The CAD is sharply lower this morning on the falling price of oil, Canada's main export, and on disappointment that the Fed is not doing more to support the US economy, the main destination for Canadian exports. The AUD and NZD both fell to 2-week lows against the USD on concerns that the escalating Eurozone debt crisis may prompt sovereign downgrades, sapping demand for riskier assets. Australian officials have been outspokenly supportive of the weaker Aussie with RBA member Ric Battellino telling reporters this morning that the slide in the currency will help insulate the nation from an economic downturn in Europe.
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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.