USD – The dollar is mixed this morning, maintaining its recent gains against the EUR while falling against the GBP and its other higher-yielding counterparts. Stocks and commodities have snapped a three-day selloff after new home sales data came in better than expected. The measure registered a larger-than-anticipated gain to 389K, a two-year high, from 368K in the previous reading. It appears that historically low mortgage rates and an improved outlook for the labor market are translating into increased sales. Investors are also anxiously awaiting the conclusion of the Fed’s monthly FOMC meeting. With QE3 already underway, no change in policy is expected from the meeting, but investors will be paying close attention to the Fed’s commentary. With the surprise drop in unemployment to 7.8% at the beginning of the month, and with steady improvement seen across the US economic data spectrum, the Fed’s tone, while likely not hawkish, may be a bit more positive. However, with interest rates expected to stay exceptionally low for years to come and with the Fed actively engaging in open-ended bond purchases, today’s decision will likely have little immediate impact on the dollar’s direction.
EUR – The euro extended its weekly declines overnight after various reports showed that both the services and manufacturing industries shrunk throughout the region. Eurozone services and manufacturing PMI contracted by more than expected, with the composite index dropping to 45.8 from 46.1. Meanwhile, the German Ifo business confidence survey fell to the lowest level in more than two years and a gauge of French manufacturing rose by less than forecast, coming in at 43.5. The disappointing numbers reflect a decline in regional economic growth as unemployment creeps higher and government austerity measures weigh on productivity. The euro also remains under pressure with Spanish PM Rajoy still insisting that he has no immediate plans for requesting foreign assistance. Rajoy has praised the ECB’s OMT bond program and the positive impact it has already had in helping yields on Spanish debt move lower, but he has failed to signal a request to activate the program. However, Spain’s relatively low bond yields likely won’t last without ECB intervention. The yield on the Spanish 10-Yr has reached as high as 5.69% overnight, up from 5.35% at the end of last week. Consequently, the continued uncertainty over the timing of a Spanish “bailout” request and slowing economic activity throughout the region will likely limit the EUR’s upside in the near term.
GBP – Sterling is higher against both the EUR and USD this morning ahead of a report that is expected to show that the British economy returned to growth in Q2. However, as BoE Governor Mervyn King stated recently, the recovery will likely be a “zig-zag,” with a strong and sustained rebound unlikely. Nevertheless, a return to growth would prove supportive of the pound ahead of the BoE’s next meeting. With their current asset purchase program set to expire in November, signs of economic expansion could prompt Bank members to strike a more hawkish tone.
JPY – The yen is relatively flat this morning as stocks stage a modest relief rally. With the continued threat of central bank intervention, investors appear reticent to be caught long JPY below 79.11 – the USD/JPY’s 200-day MA.
Commodity Currencies – The commodity linked currencies are generally higher this morning even as most raw good prices remain under pressure. The CAD extended yesterday’s gains against the USD on the back of unexpectedly hawkish BoC commentary. While the Bank did not signal an impending rate hike, the bias is still towards tightening in the future, which continues to vastly differentiate the Canadian economy from its G10 counterparts. The AUD was one of the best performers overnight after Australian CPI surged to 1.4% m/m, up from 0.5% in the previous reading. Rising inflation will likely keep the RBA sidelined at least for the remainder of 2012, thus keeping the AUD supported as the highest yielding G-10 currency.
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