• USD fell against most majors after investors speculate the Fed will continue its bond buying program.
  • EUR higher as Italy’s new govt. comes to power.
  • RMB trading stronger after PBOC relaxes its grip on the currency.

 

USD – The US dollar fell against most majors as investors counted on continuing monetary easing from the Fed and ECB to offset the risk of future disappointments over global economic recovery.  Domestically, consumer spending in the US rose more than projected in March, reflecting a jump in outlays for services.  Household purchases, which account for about 70% of the economy, climbed a mere 0.2% after a 0.7% gain the prior month.  In addition, personal incomes rose 0.2% in March after climbing 1.1% the prior month, while the savings rate held steady at 2.7%. The markets remain focused on prospects of further loose monetary policies from the Fed and ECB this week.  Last week’s data reported GDP growth of 2.5%, short of the expected 3%, weekly unemployment job claims dropped 16,000 to a seasonally adjusted 339,000 and a 5.7% order drop in durable goods in March following a 4.2% increase in February.  The downbeat US economic data will strengthen the hand of policymakers as the Federal Reserve holds their two-day policy meeting opening tomorrow.  Analysts speculate a decision to continue aggressive quantitative easing with the bond purchasing program at a pace of $85 billion a month.

EUR – The euro is modestly higher vs. the dollar on cautious optimism as Italy’s new government comes to power.  The single currency climbed above $1.31 in narrow range trading as new Italian Prime Minister Enrico Letta was sworn in Sunday as leader of a nation facing severe political and economic problems.  His swearing in ceremony was overshadowed by the shooting of 2 policemen outside the Prime Minister’s office in Rome in a further sign that anxiety over the faltering economy and debt crisis remains high.  Despite this, financial market reaction to Letta’s appointment ending months of political stalemate has been viewed positively with Italy’s cost of borrowing dropping to its lowest level since October 2010.  Meanwhile, confidence in Europe continues to deteriorate with economic sentiment slipping a lower-than-expected 88.6 in April.  Falling confidence along with the recession are prompting many to speculate the ECB will cut interest rates at its meeting this week.  The central bank is expected to cut rates by 0.25%, bringing benchmark rates to 0.50%.

GBP – The pound strengthened to a 10-week high against the dollar this morning as an industry report showed U.K. house prices increased this month, boosting optimism the recovery is gathering momentum.  This is the fourth day in a row of gains against the dollar, the first time this has happened since November.  This streak follows last week’s report showing the economy avoided a recession in the first quarter, with GDP coming in at 0.3%, higher than the 0.1% expected.  This has dampened speculation that the Bank of England will have to boost stimulus measures any further.  This week brings manufacturing data, which is expected to come in below the 50 level, which typically signifies contraction.

JPY – In Japan today is a market holiday along with Friday for Golden week ensuring that market conditions will likely prove less liquid than normal which could potentially exacerbate JPY price action heading into and following the release of the US employment rate. JPY remains elevated in part due to strong equity performance, where the correlation has been very strong; however it is noteworthy that JPY is trading well above where 10 year yield’s would support. This combined with a shift to more JPY bearish signals from technicals suggest that in the near term JPY is at risk of falling back temporarily towards the 50day MA of 95.76.

Commodity currencies – The commodity currencies strengthened against the USD after investors speculated the US Federal Reserve will announce that they will maintain its current pace of stimulative bond buying.  The CAD hit its strongest level against the USD in two weeks this morning as the greenback weakened broadly against most other currencies after the release of weak US domestic data.  Due this week for the CAD will be the Canadian raw materials and producer prices data tomorrow, and the Canadian trade balance report on Thursday.  Market participants expect the CAD to trade between the 1.0170 to 1.0100 level.  AUD and NZD strengthened against USD after USD gave a boost to riskier assets.  Economic data due this week for the AUD will be the Q1 import/export prices on Wednesday and the PPI data on Thursday.  The NBNZ’s business outlook is due later today.  Market participants still see the AUD on track to show a 1.2% decline this month, in contrast with the NZD, which is set to post a near 2% gain in April.

RMB – The offshore Renminbi, CNH, is trading at 6.1621 continuing its current strengthening trends with recent 19-year highs.  A year after China widened its currency’s daily trading band from .5% to 1%, many experts argue that it is time to further increase the band to keep the exchange rate more market-driven.  China’s central bank has been talking tough on currency reform while it has also intensified market intervention, highlighting the fine line it must walk in trying to liberalise the yuan.  Yuan critics see the Chinese central bank’s intervention as another sign that Beijing is hesistant on letting market forces determine the yuan’s exchange rate.  However, Beijing is steadily relaxing its tight grip on the currency as it tries to restructure the world’s second largest economy away from a reliance on exports and towards greater domestic consumption.  The PBOC put its daily midpoint at record highs leading up to the G20 meeting in an effort to head of speculation that it was artificially keeping its currency weak in an effort to promote exports.  Economic data due this week will be the manufacturing PMI on Wednesday.

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