USD – The dollar is headed into the weekend slightly lower against many of its major counterparts as positive data fuels a bit of risk taking. US gross domestic product, the broadest measure of economic activity, gained at a 2% annualized rate in the third quarter. Economists had predicted a more modest expansion of 1.8% after a 1.3% pace of growth was set in Q2. The better-than-anticipated results were largely due to a pickup in consumer spending and a surprising rebound in the housing industries. The results would have been even stronger had it not been for a drought in the Midwest with a drop in farm inventories taking away 0.4% from Q3 GDP. However, the positive growth data has been overshadowed by a continued string of disappointing corporate earnings on Wall St. this week. While seasonal and cyclical distortions are partly to blame for the last quarter’s disappointing corporate results, the outlook for the rest of 2012 and into 2013 is discouraging. Elsewhere, U. of Michigan confidence fell to 82.6 from 83.1 in the previous reading. Investors also took note of reports yesterday that Fed Chairman Bernanke may not seek a third term no matter who wins the Presidential election. Consequently, the dollar remains supported within its recent ranges, albeit towards the lower end against many of its peers as investors look to tepidly reenter higher-yielding positions.
EUR – The euro has pared early losses after testing its 200-day MA against the USD at 1.2883. Spain remains a cause for concern after data released this morning showed that unemployment reached an appallingly high 25.02% – a modern record – as government austerity measures take their toll. Nevertheless, Spanish policymakers continue to shy away from requesting ECB assistance even as the yield gap between Spanish and German bonds widens. Elsewhere, Italian business confidence unexpectedly declined, falling to 87.6 from 88.3 in the previous reading, with the drop in sentiment surely reflecting the worsening outlook for the Italian economy as it slips into its fourth recession since 2001. The troubles in Greece are again resurfacing as the Democratic Left – one of PM Samaras’ coalition partners – is threatening to vote against the latest “bailout” conditions. The ongoing turmoil prompted German FM Schauble to remark that he “wants Greece to be able to stay in the Eurozone. But Greece has a lot to do. It’s not yet decided.” As such, the EUR will likely remain under pressure in the near term, but with its downside limited today by the uptick in risk appetite.
GBP – The pound consolidated overnight towards the top of its recent ranges against both the USD and EUR. Investors are encouraged by yesterday’s surprisingly positive GDP report that showed the British economy pulling out of recession. The pickup in growth is prompting investors to pare bets that the BoE will expand its QE program at their November meeting, which in turn is providing support for the Sterling.
JPY – The yen has nearly erased its weekly decline overnight as technical indicators signaled it had fallen too far too fast. The disappointing data out of Europe and the drop in consumer confidence in the US are also providing a bit of support for the “safe-haven” yen.
Commodity Currencies – The commodity linked currencies are mostly higher this morning as the US GDP data encourages investors to seek higher yields. Raw goods are mixed with oil falling to $85/bbl, copper flat at $356/lb, and gold rising to $1714/oz. The CAD extended its recent declines as this week’s 7% drop in the price of oil, Canada’s main export, takes its toll. Despite the BoC taking a surprisingly hawkish stance on future monetary policy earlier this week, the Loonie is ending lower against the USD for a third week in a row. The AUD rebounded from overnight losses, rising back towards the top of its recent ranges as investors are attracted to its G10-leading yields. The ZAR is again the best performer of the group with the US data improving the outlook for South African exports.
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