- The dollar rose against most key currencies on Tuesday as investors worried about the health of the global banking sector and the sustainability of the equity rally. UBS, a huge Swiss bank, reported a wider-thanestimated loss. In the UK, Royal Bank of Scotland said it was taking more public funding, and Lloyds announced a rights issue. Meanwhile, US factory orders rose for a fifth month in six. The greenback pared earlier gains as the US stock market closed mixed. The S&P 500 was up 2.53 to 1,045.41. Investors are cautious ahead of three major central banks' meetings. The Federal Reserve, Bank of England and European Central Bank are expected to keep their key interest rates unchanged; investors will look for signs of the central banks' exit strategies. The yen declined modestly. Japan was closed for a holiday. Sterling recovered earlier losses and traded little changed in late afternoon trading. The Canadian dollar rose modestly as crude prices increased and gold prices hit a new all-time high. The Australian dollar declined modestly after the Reserve Bank of Australia raised its key rate 25 basis points to 3.50%, as expected, but downplayed further rate increases.
- The EUR/USD fell on Tuesday after the European Commission warned about further bank losses and that credit growth will be weak until banks repair their balance sheets. In addition, the EC sees slow economic growth in 2010-11. The EUR/USD tested the diagonal support from the long-run uptrend the last few days. If the 1.47 handle is broken, the pair will turn bearish. This is more likely to happen if the stock market correction continues. The S&P 500 is likely to test the support in the 980 area. Our long EUR/USD position was stopped out today with a small profit.
Financial and Economic News and Comments
US & Canada
- US factory orders rose 0.9% m/m in September, the fifth gain in six months, to $356.1 billion, after a 0.8% m/m decline in August, figures from the Commerce Department showed, suggesting the US manufacturing sector is recovering. Excluding transportation, factory orders advanced 0.8% m/m in September, following a downwardly revised 0.3% m/m August increase. September factory orders fell 15.4% y/y nsa.
- The contraction in the UK construction sector continued to intensify in October, according to data released by Markit Economics and the Chartered Institute of Purchasing and Supply. The CIPS/Markit UK construction PMI unexpectedly declined to 46.2 in October from 46.7 in September and 47.7 in August.
- UK house prices rose 1.2% m/m in October, a fourth consecutive month-on-month gain, to an average of £165,528 ($271,231) per home, after a downwardly revised 1.5% m/m increase in September, according to a Halifax report. October house prices declined 1.5% y/y. House prices fell 4.7% y/y in the three months through October, improving for a sixth straight month and easing the pace of decline following a 7.4% y/y decrease in the three months through September.
- The eurozone economy will grow 0.7% in 2010 and 1.5% in 2011, after contracting 4.0% in 2009, the European Commission said in its semi-annual economic forecasts. The deficit will widen to 6.9% of GDP in 2010 and unemployment will rise to 10.9% in 2011, the highest level since at least 1995, the EC said.
- The Reserve Bank of Australia raised the cash rate 25 basis points to 3.50%, as forecast, and signaled a rise in the Australian dollar to near parity with the US dollar has given the central bank scope to slow the pace of future rate hikes. RBA Governor Glenn Stevens said: The Board noted that the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures. Nonetheless, growth is likely to be close to trend over the year ahead and inflation close to target. With the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead. Following today's RBA rate decision, traders reduced bets on another quarter-point increase next month.
FX Strategy Update