USD – The dollar is mixed this morning as it loses some of its “safe-haven” appeal on positive developments in the Eurozone and stronger than expected domestic production data.  Industrial production posted a 0.4% gain in September, better than the 0.2% that was expected.  While the figure is an encouraging sign for manufacturing, mining and utilities, today’s gains only partially reversed the 1.4% decline that was recorded in August.  Nevertheless, the improving numbers likely reflect a stabilizing economy, and are supportive of faster economic growth this quarter and next.  Meanwhile, consumer prices gained by 0.6% for a second straight month, led higher by rising fuel costs.  Surveyed economists had predicted a slightly smaller 0.5% gain.  While rising prices will often be followed by tighter borrowing costs, with a headline inflation rate at just 2.0%, the Fed is likely not too concerned just yet.  Elsewhere, Treasury International Capital data showed that foreigners increased their holdings of US assets last month as the ongoing Eurozone debt crisis continues to drive capital towards “safe-haven” assets.  Flows gained to $90B from $67.2B in the previous reading.  Finally, with both stocks and commodities in the black this morning, the dollar has slipped against many of its riskier peers as investors seek yield.

EUR – The euro broke back above the key 1.30 handle against the dollar on rumors that Spain will soon request rescue aid.  However, conflicting news reports highlight the uncertainty over timing and even what type of assistance they may seek. The FT reported that upon conditional approval from some of the region’s core parliaments, Spain will tap into the ECB’s Outright Monetary Transactions program. Meanwhile, Bloomberg reported that Spain is looking to hold off for as long as possible to receive the best terms available.  Nevertheless, it appears that regional policymakers approve in theory with German lawmakers today stating that they would be open to Spain seeking a “precautionary credit line” from the ESM.  This is in contrast to Finance Minister Schauble’s comments just days ago where he cautioned Spanish lawmakers over seeking further aid on top of the €100B that has been earmarked to recapitalize Spanish banks.  “I’m not in the camp that says ‘take the money.’ They would be daft” to ask for another bailout if they don’t need it.  Nevertheless, progress, albeit limited, has proved supportive for the common currency with it retesting its recent highs. 

GBP – Sterling is mixed this morning, gaining against the dollar while falling vs. the EUR.  British CPI was also released this morning, coming in at 0.4% vs. 0.5% in the previous reading.  On an annualized basis, the measure dropped to 2.2% (lowest in nearly three years) from 2.5%, thus marginally raising the odds that the BoE could pursue further QE at their meeting next month.  As such, the pound fell to a one-month low against the EUR, but the improved risk sentiment elsewhere has kept it supported versus the dollar.

JPY – The yen extended its recent declines overnight as improved market conditions sap demand for its relative safety.  The positive data out of the US and increased expectations that Spain and the ECB may be close to a deal are adding to the risk-on trade.  Moreover, the leader of Japan’s main opposition party voiced his view that the BoJ should raise its inflation target from the current 1% to 2-3%.  If this were to happen, further easing would be an absolute must. 

Commodity Currencies – The commodity linked currencies are mixed this morning with the CAD lower while the AUD and MXN gain. The CAD neared a three month low against the dollar after BoC Governor Carney hinted at slower growth going forward. While the comments aren’t inherently negative, signs of a protracted recovery – and thus a longer period of unchanged interest rates – will limit any gains in the loonie.  Meanwhile, minutes from the RBA’s last meeting showed that policymaker see scope for further easing in the coming months as Asian growth slows.  Nevertheless, the AUD is slightly stronger as investors seek its relatively high yield.


For more market reports go to Union Bank of California