USD – The dollar looks to end the week on a high note against most of its peers as stocks and commodities struggle to maintain early gains.  Consequently, the dollar remains well supported towards the top of its recent ranges as investors are attracted to its relative safety.  On the data front, U. of Michigan confidence came in better than expected, rising to 84.9 – a five year high – from 82.6 in the last reading.  A more modest gain to 82.9 was expected.  An improved labor market, lower gas prices and rising home values are all supportive of the increase in confidence.  While US companies struggled to post profits in the second and third quarter, the improving outlook could be positive foreshadowing ahead of the busy holiday season.  In further signs of improvement, wholesale inventories gained by 1.1% - the most in a year – even as sales increased.  Import prices also unexpectedly rose in October by 0.5% as pervasive USD weakness, against Asian currencies in particular, pressured costs.  Investors will take note of PPI and CPI data due next week to see if these cost increases are trickling through to the consumer.

EUR – The euro extended its recent declines against most of its peers on speculation that the regional economic outlook is worsening.  Production data out of France fell by more than expected with industrial production contracting by 2.7% and manufacturing production by 3.2%.  While the debt crisis roils on in Greece and Spain, the region’s core economies are feeling the pain of lower demand and slow growth.  However, technical indicators are suggesting that the common currency’s recent declines may be nearing an end, or at least slowing, with the EUR now trading below its 200-day MA for five straight sessions.  However, while the euro’s losses may slow in the near term, the longer term outlook for the region remains dismal.  This morning, Spanish airline Iberia announced that it would be laying off more than 4,500 employees, or 22% of its workforce, while protestors took to the streets in Greece in the wake of the most recent wave of austerity cuts.  While consolidation may provide a bit of support for the euro over the next several weeks, expect further declines before year end.

GBP – The pound is lower against both the EUR and USD this morning as investors expect the British economy may be nearing a triple-dip recession.  Recent data has been quite week, with trade data this morning showing a sharp drop in exports.  This comes just a day after the BoE decided to forgo further monetary easing, thus prompting increased expectations that the economy may again begin to slow.  Investors are thus pricing in further QE with a likely restart to the BoE’s asset purchase program coming as soon as December.

JPY – The yen extended its recent gains overnight before data due on Monday is expected to show a sharp contraction in Japanese economic growth.  Annualized GDP is expected to contract 3.4% after a 0.7% gain in the previous reading.  While seemingly contradictory, much like when bad data comes out of the US, negative numbers in Japan provides support for the yen as investors are attracted to its relative stability.

Commodity Currencies – The commodity linked currencies are relatively flat this morning as stocks and commodities pare overnight losses.  The CAD gravitated back towards parity with the USD for a second day in a row despite the rising price oil – Canada’s main export – and the strong data out of the US – the main destination for Canadian exports.  Similarly, the MXN is slightly stronger this morning after the Mexican Lower House passed a bill that weakens union rules.  The measure should provide even more reason for US companies to shift manufacturing south of the border.  The AUD and NZD are both higher after data out of China – the South Pacific nations’ primary trading partner – came in better than expected with industrial production gaining by 9.6% after 9.2% in the previous reading. 


Foreign exchange, and derivative transactions are not Bank deposits, are not insured by the FDIC or any government agency, and may involve substantial risk, including significant volatility and the potential risk of loss of principal. These materials are not intended to provide investment, financial, accounting, legal, or tax advice. These materials are for discussion purposes only. No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. All rates and quotes are indicative and are subject to change at any time without notice. Neither this, nor any other communication received from Union Bank, whether written or oral, is, or should be construed as, a recommendation or solicitation with respect to the purchase or sale of any security or instrument or the execution of any particular transaction with Union Bank or any other potential counterparty. No information received from us is any assurance or guarantee as to the expected results of any foreign exchange or derivatives transaction.  Before entering into any foreign exchange or derivatives transaction with Union Bank, you must make your own independent decision to enter into that transaction, understand the terms, conditions and risks (financial and non-financial) of that transaction, and be willing to accept those terms and conditions and to assume those risks.


For more market reports go to Union Bank of California