- US jobless claims register below 400K for the second straight week; housing market data registers better than expected;
- The ECB purchased Spanish and Italian government bonds, driving yields marginally lower; France advocates for the ECB being utilized as a lender of last resort;
- British retail sales surprise to the upside, but the UK economy still faces a difficult road ahead with investors beginning to price in further rounds of economic stimulus from the BoE.
The US Dollar is modestly lower against most of its major counterparts on signs that European leaders are being proactive in staving off rising borrowing costs and on speculation that China may soon ease monetary policy. However, the dollar's stronger position remains largely intact with the dollar index remaining near its strongest since the beginning of October, and nearly 5% off its recent lows reached earlier this month. Meanwhile, mixed economic data out of the US has investors speculating about the direction of future Fed monetary policy. PPI and CPI reports earlier this week showed a significant easing in inflationary pressures, thus giving room for the Fed to consider another round of stimulus, but data this morning has markets wondering if it will be necessary. Housing starts and building permits, leading indicators for the housing market, both registered better than expected at 628K and 653K respectively. Weekly jobless claims also beat forecasts at 388K, showing continued improvement after last week's sub-400K reading. However, a measure of manufacturing activity in the Philadelphia area fell short of expectations at 3.6 versus a forecast of 9.0. Investor sentiment also got a boost this morning after an unnamed PBoC official told reporters that the Chinese central bank will likely begin lowering reserve requirements, and possibly ease monetary policy in the coming months as both inflation and economic growth cool in the world's second largest economy.
The EUR is marginally higher against the USD this morning, but remains well entrenched towards the bottom of its recent ranges. The brief reprieve came as yields on Italian bonds reversed course, falling for a second day as the ECB purchased the embattled nation's debt. The Italian yield curve fell back below 7% on all maturities short of 30 years, and Spanish yields dropped below 6% on all maturities short of 7 years. However, borrowing costs still remain at historically high levels in nearly all of the Eurozone countries other than Germany. The disparity amongst member nations is also straining political relations with France's finance minister telling reporters that the ECB should be a lender of last resort, the exact opposite of the German position. Dollar funding costs for European banks has also been steadily rising, with costs now the highest since 2008, as banks' willingness to lend to one another fades.
Sterling is off its recent lows this morning, snapping a three-day decline against the dollar after a better than expected retail sales report out of the UK. Sales excluding autos and fuel were expected to drop by 0.3%, but in fact gained 0.6% over last month, bringing the measure to +0.9% on an annualized basis. In seeming juxtaposition, an index of British consumer sentiment fell to a record low on the worsening situation in mainland Europe and on worsening employment outlook in the UK. As such, the overall negative outlook for the British economy remains intact, and investors are expecting the BoE to soon pursue another round of quantitative easing to support the economy.
The JPY remains well supported on either side of 77.00 as global financial markets gyrate between gains and losses. While much rhetoric of continued support of the yen and successive rounds of central bank intervention has been leaked to the media over the past several weeks, Japanese assets remain a clear proxy for market risk with a report this morning showing that foreign investors purchased a net JPY 406B of short-term Japanese debt.
The Commodity Currencies are mixed this morning with the CAD gaining while the AUD and NZD both remain under pressure. Raw goods prices are broadly lower with oil pushing back towards $100/bbl after the initial speculative run-up following yesterday's announcement that the direction of an oil line between Oklahoma and the Gulf Coast will be reversed. Gold tumbled 2% to $1737/oz, copper fell to $339.90/lb and consumables were generally lower. The CAD traded through a tumultuous overnight session, initially falling on the lower price of oil, Canada's main export, and on the European turmoil. However, it has since pared those losses and moved in to positive territory for the day on the encouraging housing and labor market data out of the US, Canada's main trading partner. The AUD and NZD both extended their declines against the USD for a fourth day amid concerns that the European crisis will slow global economic growth. Meanwhile, investors have increased bets that the RBA will cut interest rates further in the coming months while the RBNZ will keep rates on hold as inflation eases in both Australia and New Zealand and global demand declines.
CHANGE FROM CLOSE
10-Year Treasury Yield:
This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.