USD - The dollar begins the week higher against all of its major counterparts other than the JPY as modest improvement in risk sentiment seen at the end of last week quickly fades. Europe has again come into focus with Spain formally requesting financial aid for its beleaguered banking sector, and sovereign debt yields are again moving higher, raising the stakes for a Eurozone summit scheduled for Thursday and Friday this week. Meanwhile, a series of relatively strong economic releases in the US were not enough to offset the dour mood. New home sales unexpectedly jumped 7.6% to 369k from 343k in the previous reading, reflecting further declines in mortgage rates and modest improvement in the labor market. A gauge of regional manufacturing activity in Dallas, TX also improved, coming in at 5.8 versus an expected reading of ?2.0, more than reversing last month's decline of 5.1. The manufacturing numbers are particularly encouraging after last week's disappointing reading of Philly Fed data and as slowing global growth and an appreciating dollar weighs on the demand for US?made goods. For the week ahead, investors will focus on consumer confidence and Richmond Fed, both due on Tuesday and durable goods orders on Wednesday. Thursday brings GDP with a flat reading expected at +1.9%, and weekly jobless claims. The week closes out with personal income, personal spending, and U. of Michigan consumer confidence all on Friday. However, with European politics and the region's ongoing struggles with rising debt yields stealing the spotlight, the dollar will remain towards the stronger end of its recent ranges, supported by its role as a safe?haven asset.
EUR - The euro edged lower in early trade, extending last Friday's selloff, as policymakers look as divided as ever ahead of a key regional summit later this week, and as Spain formally requests bank aid. In a speech this morning, German Chancellor Merkel made her position quite clear, dismissing euro bonds, euro bills and European deposit insurance with joint liability...as economically wrong and counterproductive. However, Merkel is facing an increasingly united front with her fellow Eurozone leaders as Spanish, Italian and now French policymakers look to support growth rather than austerity. Aside from the threats that the exit of a eurozone member from the currency bloc pose to the common currency, the growing divide amongst policymakers is adding to the downward pressure on the EUR. Pro?growth proponents from France, Italy and Spain would surely not mind to see the EUR weaken against its major counterparts, and exporters in Germany likely wouldn't be upset with a bit of depreciation as well. Moreover, investors are beginning to price in further easing from the ECB since Greece's debt struggles first came to light disappoint later this week. However, with hope of some sort of grand plan still lingering, the EUR's declines will remain in check, at least in the near term.
GBP - Sterling continued to diverge this morning, slowly weakening against the USD, while edging higher against the EUR as European investors look for safety. Dovish commentary from BoE member David Miles sparked this morning's declines as it appears the case for further Quantitative Easing is quickly gaining support. Do we need a more expansionary monetary policy? 'Yes.' Should it be a substantial change in asset purchases? 'Yes.' Is £50B a substantial number? 'Yes it is.' However, sterling's declines will likely be limited in the near term as both the ECB and Fed are expected to ease monetary policy as well.
JPY - The yen has recovered against the USD this morning, pushing back towards its 200?day moving average at 79.60, as the selloff in stocks and commodities steepens. The yen also gained after Japanese PM Noda secured opposition support for a hike in the retail sales tax, with parliamentary approval expected to begin tomorrow. However, whatever the outcome may be, either decision could weigh on the yen. Should the tax hike fail, Japan's credit rating may be cut, but if it passes, the BoJ will likely increase its asset purchase program to offset the fiscal drag. Nevertheless, the yen will continue to derive support in the near term, with investors attracted to its relative safety.
Commodity Currencies - The commodity currencies are generally lower this morning as risk assumption slows. Raw goods are lower with oil falling to $78/bbl, copper at $329/lb, and consumables largely in the red. The CAD pared recent gains in early trading, falling to a two?week low on the weaker price of oil, Canada's primary export. Similarly, the AUD weakened, dropping back below parity with the USD as stocks and commodities slipped deeper into the red. However, declines in both currencies may be slowed by increased demand for their AAA?rated debt as investors look for relatively safe investments. Reflecting this fundamental shift, futures traders trimmed bets that the AUD will depreciate against the USD for the first time in more than two months. The Aussie has also found support after the Russian central bank began buying AUD last week, with an initial target of AUD comprising up to 1% of Russia's FX reserves. For the week ahead, investors will take note of Australian labor market data on Wednesday and Canadian GDP on Friday, both of which are expected to show modest improvement.
MXN - The peso weakened back towards its recent lows against the USD in early trading as investors sell risky assets. The MXN remains below the key 14.0 handle against the USD on reports that the Mexican central bank continues to provide support at that level. However, slowing declines may become difficult as a hotly contested Mexican presidential race enters its final week with Enrique Pena Nieto in the lead amid charges that his Institutional Revolutionary Party will erode freedoms gained in the 12 years since the PRI fell out of power.
RMB - CNY fixing came in higher at 6.3230 weaker than the prior fixing of 6.3040, while CNH held within the 6.3700?3780 range. Analysts stated that they did see onshore selling, which could be an attempt by PBoC to reduce the gap in the fixing/spot rates that have been hitting the 1% limit. The market will look towards next Monday's PMI reading for further direction into the world's second largest economy.