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USD – The dollar is on the defense this morning, falling against all sixteen of its most actively traded peers. The move comes despite lackluster results on Wall St. as investors grow increasingly comfortable with the debt situation in Europe. Domestically, the market was met with a surprising resurgence in housing starts with the figure jumping to 872K in September from 758K in the previous reading. The number represents a four-year high in just the latest sign that not only has the housing sector finally bottomed, but is on the mend. Building permits – a forward looking gauge of future expected construction – also gained by far more than expected, rising to 894K from 801K. However, the positive data has proved unsupportive for the USD as it saps demand for its relative safety. With unemployment still high and inflationary pressures remaining relatively low, the Fed will likely continue with its easing policies to foster the burgeoning recovery seen in the housing and manufacturing industries. Consequently, the dollar may ease further, but will likely remain within its recent narrow range against the EUR of 1.28 – 1.33 in the near term.
EUR – The euro jumped to a one-month best against the dollar to the mid 1.31’s as Spain maintained its investment grade. While seemingly contradictory, Moody’s decision to cut Spain’s sovereign debt rating to one notch above junk status is actually quite supportive. The move shows that the ratings agency is accounting for ECB bond market intervention a day after rumors arose that Germany was now open to the ESM extending a precautionary credit line to the embattled nation. This in turn would allow Spain to tap into the ECB’s Outright Monetary Transactions program. Consequently, yields on Spanish debt are sharply lower this morning with the 10-Yr falling below 5.5% for the first time since April. However, expectations are high with Eurozone leaders meeting this weekend in Brussels, and as seen before, that often leads to disappointment. Spanish PM Rajoy has repeatedly expressed his equivocation on receiving assistance beyond the €100B already set aside for the Spanish banking sector. While the waiting may simply be an attempt to get better deal terms from foreign creditors, the lack of concrete action or a timetable will keep the euro’s gains in check in the near term.
GBP – Sterling is higher this morning against most of its major counterparts as investors pare bets that the BoE will ease policies further. British jobless claims fell, dropping a further 4K versus an expected flat reading. With signs that the economy is on the mend, investors are suspecting that BoE policymakers may not renew their QE measures at their meeting in November when the current easing program expires.
JPY – The yen is flat against the dollar, but extended its weekly declines against the EUR to nearly 2.5%. The improved situation in Europe is cutting demand for the yen’s relative safety and investors still suspect that Japanese officials may intervene in FX markets.
Commodity Currencies – The commodity linked currencies are all higher this morning as investors are attracted to their yields. The CAD broke a three-day slide as risk aversion eases and Canadian Industry Minister Christian Paradis also commented on the loonie’s relative strength, stating that a “high dollar brings challenges, but it also brings new opportunities, new purchasing power, and if played right, a strategic advantage.” Similarly, the AUD is nearly a percent higher as investors seek its G10 leading yields. However, deteriorating economic fundamentals will likely limit any substantial Aussie gains.
RMB – The yuan climbed to a fresh all-time high overnight against the dollar as Chinese officials feel the pressure of the US presidential election season. Both Romney and President Obama have stated their disapproval of the Chinese government’s manipulation of the currency. Yet, officials may buffer against further substantial gains as a weakening global economy crimps demand for Chinese exports.
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