USD - The dollar's plunge yesterday against the euro and other major currencies was certainly substantial, but the scale of the move is surely more a reflection of positioning in the market rather than an indication of any notable change in the outlook. Asian equity markets are higher today, but recent gains suggest a degree of caution over the scale of the rebound in the dollar's return. After yesterday's holiday, there is a little on the agenda for the US. The only notable data is the NFIB Small Business Optimism report. There has been a wide gap between this report and the ISM manufacturing data highlighting the different conditions between large and small companies. The NFIB index continues to indicate recessionary conditions, but today's release at 88.90 showed a small bounce (0.10) in confidence after six consecutive declines. The Citi Economic Surprise Index shows the data from the US improving relative to expectations in contrast to Europe. This fact along with rising yields in the US should limit the downside for the US dollar.
EUR - The optimism over a bank recapitalization deal reached over the weekend between Germany and France has helped risk-on trades so far. Slovakia's ruling party will pressure lawmakers to ratify the EFSF by threatening to tie the parliamentary vote today on the facility with a noconfidence motion. The Freedom and Solidarity Party is set to abstain on the vote, forcing the government to rely on the opposition. Prime Minister Radicova said It is my sincere wish that the EFSF vote will pass, but in case our coalition partner refuses to change its mind, it will be inevitable to have a repeat vote. The euro fell less than 0.1% to $1.3636 at 11:03 a.m. in New York after rising 2% yesterday in the biggest gain since July 2010. The shared currency reached $1.3699 yesterday, the highest level since Sept. 21.
GBP - Sterling retreated from its one week high after the British Chambers of Commerce said the expansion of the central bank's monetary stimulus program might not be enough to prevent another recession. The government reported that manufacturing shrank more than anticipated in August further adding to the concern. Last week the central bank raised the ceiling for bond purchases to 275 billion pounds from 200 billion, the biggest expansion since the first round of stimulus in March 2009. As a result of this move, the market is thinking that Sterling might retreat to 1.5000.
JPY - Despite the contraction in trade surplus, the JPY remains flat against the USD and has outperformed against all other major currencies on the recent environment of risk aversion. The Ministry of Finance data showed Japan's current account fell 64.3% in August, as the surplus stood at ¥407.5bn from a ¥990bn the previous month. Despite the narrowed trade data, the general mood in Japan is improving. The Cabinet Office reported Japan's index of leading indicator rose 0.3 points m/m in August and consumer confidence improved 1.6 points m/m in September. The data suggested a steady recovery from the March earthquake and worries over a global slowdown. Meanwhile, China's recent debt purchase of $2.3bn of Japanese government debt, likely providing support for the JPY, is evidence the BoJ is welcome to diversify its holdings in efforts to lift the crippled economy.
CAD - The CAD has come back against the USD after Germany and France vowed to deliver a plan to support the region's banks. The CAD declined 6.9% against the dollar in September; the biggest monthly decline in almost three years, on fear the debt crisis would not be contained. As such, the resolution was good news for the loonie. This week is light on economic releases, so look for the currency to track oil prices as the market looks for direction.
MXN - The Mexican peso recovered from its distressing levels against the dollar last week as better-than-expected US non-farm payroll data boosted investors' confidence for high yielding currencies. The peso traded over 6% higher against the dollar at the start of this week against last Monday's high. However, analysts believe the currency is still at risk of a further drop as concerns over Europe's systemic debt crisis persist.
AUD - The Australian dollar rose earlier this week above parity against the US dollar after commodity prices recovered from recent lows. Betterthan-expected jobs and business confidence data last month also provided some much needed support for the currency. A government report showed that Australian employers added 10k jobs last month vs. cuts of 9,700 in August, while the nation's business confidence strengthened in September by the most since January. Despite this week's gains, the Aussie may be at risk of further selloff if risk aversion heightens due to market concerns on Europe as well as New Zealand's budget deficit.