USD – The dollar is stronger against all of its major counterparts this morning with the exception of the JPY as stocks and commodities begin the week in the red. After a recent low on September 13th following the Fed’s announce meant of QE3, the dollar index has rebounded more than 1.5% against its G10 peers. Despite the new open-ended quantitative easing program, investors are again turning to the dollar and its relative safety with the ongoing debt crisis in Europe, slowing growth in Asia and growing unease in the Middle East. On top of that, the US economy appears comparatively healthy versus many of its G20 peers with data last week suggesting that a recovery the housing market may be gaining traction. Nevertheless, the Fed’s lax policies run the risk of stoking inflationary pressures, which in turn would likely weigh on consumption at a time when employment remains frustratingly weak. In the days ahead, investors will take note of consumer confidence and the house price index on Tuesday. The middle of the week sees the release of new home sales on Wednesday and GDP, consumption, durable goods orders, weekly jobless claims and pending home sales all on Thursday. The week closes out with personal income and spending, Chicago PMI and U. of Michigan confidence on Friday. With mostly improved readings expected across the spectrum, the dollar will likely extend its weekly gains and gravitate back towards the better end of its recent ranges.
EUR – The euro declined to a one-week low against the dollar with the German IFO survey posting another unexpected decline and as regional policymakers clashed over the introduction of a Eurozone banking union. The IFO – a gauge of German business climate – declined for a fifth straight month despite a forecast of a gain. Meanwhile, German Chancellor Merkel and French President Hollande met at a commemoration of German-Franco reconciliation after WWII, but were unable to hide their differences regarding a banking union for the region. Hollande told reporters “the earlier, the better,” while Merkel said there’s no point in doing something fast if it doesn’t work. Greece is also again becoming a cause for concern as EU officials have purportedly found that the nation’s budget deficit is nearly twice that of what the Greek government has announced. While the report was immediately refuted by Greece’s leaders, it’s clear that the nation’s finances are not in good shape, and that further assistance will likely be needed to keep the government from missing redemption payments in the months ahead. The size of the ESM – the region’s permanent “bailout” fund – is also under scrutiny this week as it appears Spain is moving closer to requesting further assistance. However, in a bit of good news, German Finance Minister Schauble is reportedly in favor of a plan that would allow the ESM to leverage its funds, increasing its total firepower from €500B to nearly €2T. Nevertheless, the ongoing uncertainty will undermine the common currency’s recent gains with a slow and steady decline against the dollar expected with the pair likely gravitating back towards its 200-day MA at 1.2884 in the near term.
GBP – The pound opened the week mixed, dropping against the USD while gaining against the EUR. With no major data out to sway investors otherwise, the sterling looks relatively attractive next to its mainland European counterpart as the risk-off trade drives demand for “safe-haven” British assets. However, the weakness against the dollar may worsen as data this week is expected to show that the UK economy remains mired in recession, thus increasing the odds that the BoE will ease policy further before the end of the year.
JPY – The yen gained for a fifth straight day against the dollar as investors seek its relatively safety. Shrinking yield gaps are driving yen strength with the difference between Japanese and US two-year assets falling to eight basis points – the narrowest gap since 1992. Consequently, the yen has extended its recent gains against the dollar despite the BoJ’s efforts to stem the recent gains through an increase in its asset purchase program.
Commodity Currencies – The commodity linked currencies are generally lower this morning as the risk-off trade takes its toll on higher-yielding currencies. Raw goods begin the week in the red with oil extending its recent declines to $91.50/bbl, gold falling to $1763/oz, and copper tumbling to $373/lb. The CAD slipped to a two-week low in early trading with the price of oil – Canada’s main export – extending its 10-day loss to 7.85%. The loonie is also lower as the ongoing Eurozone debt crisis saps demand for riskier assets. Similarly, the MXN fell this morning as investors trim bets that the central bank of Mexico will raise interest rates in the near term. With the Mexican economy’s close ties with its Northern neighbor, Mexican policymakers have likely been handcuffed by the Fed’s recent QE3 program. With a widening yield gap between Mexican and US assets, central bank President Carstens will likely keep rates on hold through the end of the year discouraging an inflow of foreign capital to avoid the impact of an appreciating peso on exports. Meanwhile, the AUD is lower as the RBA’s next policy meeting on October 2nd comes into scope. Investors are widely suspecting that the apparent stalemate in Europe and slowing growth in China – the main destination for Australian exports – will spur policymakers to lower interest rates.
RMB – USD/CNH held close to a narrow range of 6.3110-6.3155 overnight with tight liquidity as CNH forwards climbed to +1520/1535 and as USD/CNY held above 6.300. In other news, the S&P has lowered its forecast on China GDP to 7.5%, below the original 8% call for 2012. The move to lower the GDP forecast comes from thoughts that a tail effect of inflation stemming from the 2008/2009 stimulus will pressure the economy. The market will look towards tomorrow’s release of the CB leading indicator, which aggregates six economic indicators that measure economic activity in China. Also on Friday the HSBC Manufacturing Purchasing Managers Index (PMI) is due out. Last month’s reading came in at 47.8%.
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