USD – The dollar is off to a strong start to the week, gaining against most of its most actively traded counterparts as stocks and commodities fall on renewed fears over Eurozone debt and the US fiscal cliff. With the risk‐off trade gaining momentum, investors are increasingly attracted to the USD’s relative safety and the US economy’s general outperformance compared with its European counterparts in particular. Moreover, with apparent progress being made in Congress towards avoiding the so‐called “fiscal cliff”, the argument against holding US assets has weakened considerably. With President Obama having secured a second term in office, politicians can get down to brokering a deal with both sides of the aisle recently signaling their willingness to compromise. In all likelihood, a deal will be struck before the new year. The volatility will likely prove supportive of the USD as a failure to get a deal done on Capitol Hill would likely result in an immediate double‐dip recession. In the meantime, investors will take note of PPI, retail sales data, and the minutes from the Fed’s last meeting due on Wednesday. Thursday sees the release of CPI, Empire manufacturing, Philly Fed, and weekly jobless claims. The week then closes out with industrial production and net treasury international capital flows on Friday. While progress towards avoiding the fiscal cliff could undermine the dollar’s “safe‐haven” appeal in the coming months, worsening economic conditions elsewhere in the world will likely keep the dollar an investor favorite in the longer term.
EUR – The euro slipped to a fresh two‐month low against the dollar this morning as Greece’s ongoing struggles with debt again come into view. With the latest projections suggesting that Greece will not be able to meet its initial target of reducing government debt as a percent of GDP to 120% by 2020, regional finance chiefs decided to give the struggling nation two additional years to meet their immediate goals. Moreover, foreign creditors led by Germany preliminarily opted to allow Greece access to its next tranche of “bailout” funds rather than risk a possible default and a resulting Greek exit from the Eurozone. While final approval on releasing the next round of funds won’t likely be known until later this week, it appears to be “a done deal” according to the Greek Finance Minister. German officials signaled that they were willing to cut rates on bailout loans or give Greece time to pay with debt write‐offs, while legal, remaining politically taboo for German Chancellor Merkel who is facing a difficult reelection in 2013. Elsewhere, German investor confidence fell for the first time since August, coming in at ‐15.7 from ‐11.5 in the previous reading. Consequently, the EUR will likely struggle to gain traction in the near term, but declines may slow as several technical indicators suggest that it is approaching oversold territory.
GBP – Sterling is virtually flat against the dollar, but higher versus the euro as investors focus on mainland Europe’s ongoing struggles with debt. Data released in the UK this morning has proved supportive for the pound with both PPI and CPI coming in higher than expected at 2.5% and 2.7% respectively. A gauge of house prices also showed improvement, gaining to ‐7% from ‐14% in the previous reading. Consequently, expect sterling to firm in the coming weeks against most of its counterparts other than the “safe‐haven” USD and JPY as today’s data reduces the likelihood of further BoE easing even further.
JPY – The yen edged higher, supported in its role as a “safe‐haven” asset, and despite the sharp worsening of Japanese economic data. Numbers released yesterday showed that Japan may be facing its fifth recession in 15 years with GDP contracting 3.5% after a 0.3% gain in the previous reading. While Japan may be prone to recession, the recent recording of the nation’s first current account deficit in at least 27 years and a negative turn in nation’s balance of trade have worrying implications in light of the nation’s massive debt load. Nevertheless, investors will continue to view the yen as a relatively safe bet, at least for the time being, with further consolidation to be expected near the USD/JPY’s 50 and 200‐day Mas in the low 79’s.
Commodity Currencies – The commodity linked currencies are generally lower with stocks and raw goods beginning in the red. Oil fell to $84/bbl, gold slipped to $1720/oz, and copper is down to $342/lb. The CAD extended its declines past parity with the USD for a third straight day as the Greek debt concerns weigh on investor risk appetite. The loonie is also lower thanks to the falling price of oil, Canada’s primary export commodity. Similarly, the MXN extended its recent declines, falling to its weakest in nine weeks against the dollar, as investors look for less volatile assets. The AUD is also lower with the outlook for China – Australia’s largest trading partner – dimming on slowing demand elsewhere. However, the AUD’s longer term prospects remain positive with Chinese officials announcing their desire to see direct trade between the AUD and CNY, thus eliminating the need for either Australian or Chinese counterparties to use the USD, EUR or JPY as an intermediary currency in trad dealings.
RMB –USD/CNY continues to gain, posting a record high against the dollar with the fixing coming in at 6.2891. This is the second day in a row where the yuan has closed at the strongest point of the 1% trading band implemented last April. Analysts expect the yuan to keep pushing higher, potentially seeing 6.2000 in the medium term. Traders, however, are cautious of an intervention given that a stronger yuan could hurt China's export competitiveness.