USD – The dollar begins the week mixed against its major counterparts after a disappointing reading of ISM manufacturing sets the tone for the week ahead. The measure fell short of expectations, coming in at 49.5 versus the 51.4 that was anticipated. The reading marks the first contraction in more than three years as orders extended a recent slide and exports slowed. After leading the economic recovery for much of the past three years, manufacturing has fallen off significantly as disturbances from bad weather this fall are only compounding the drop off in overseas demand for American made goods. Meanwhile, construction spending nearly tripled from last month coming in at 1.4%, signaling that the sector is poised to make more of a contribution to economic growth in ’13. For the week ahead, investors will take note of factory orders, ISM non-manufacturing, and the ADP jobs report all due on Wednesday. Thursday sees Challenger job cuts, weekly jobless claims and a gauge of consumer confidence all in a run up to Friday’s much anticipated nonfarm payroll and unemployment reports. Elsewhere, investors are keeping tabs on the ongoing developments on Capitol Hill with negotiations nearly stalled. However, both sides seem willing to capitulate on easing the tax burden on the majority of Americans with the major point of contention now focused the top 2% of earners. Consequently, the dollar will likely remain within its recent narrow ranges as investors await Friday’s labor reports and any finalized direction regarding fiscal policy.
EUR – The euro extended its recent gains in early trading, rising to a one-month high against the dollar after Greece announced a debt buy-back program worth €10B. German Chancellor Merkel also hinted over the weekend that she would consider taking a haircut on Greek debt holdings in the coming years assuming she secures reelection in ’13 and the debt buy-back program is successful. With investor confidence generally improved, the common currency has edged higher against most of its counterparts as regional bond markets rallied, led by Greece, Italy and Spain. The political gridlock in the US over fiscal policy is also providing a bit of support for the EUR this morning as investors seek alternatives to the dollar. Nevertheless, euro gains will likely remain modest, at least in the near term, as the underlying economic struggles of the region remain largely unaddressed. On Friday, Moody’s Investor Services downgraded the two-month old ESM – the region’s permanent bailout fund – one notch from Aaa to Aa1. However, with no country likely to tap the program in the near term, investors aren’t too concerned with the downgrade just yet. For the week ahead, expect the EUR/USD to remain towards the middle of its 1.27-1.32 range that has persisted since September.
GBP – The pound has strengthened against the dollar, extending gains to a new five-week best. The rise was driven by an improvement in PMI manufacturing data, with the measure rising from 47.3 to 49.1. British retail sales are expected to recover after a disappointing reading in October as consumers hold off on spending ahead of the upcoming holiday season. Investors will also take note of industrial production data on Friday. In addition, the BoE meets on Thursday, but no changes are to be expected. Overall, the GBP has managed to sustain its recent modest gains with the upside likely to win out in the near term.
JPY – The yen pared some of its early gains, but remains within its recent weaker ranges against both the USD and EUR. Further consolidation is to be expected in the coming days as technical studies indicate that the yen is oversold at its current levels. Despite record levels of short positions – bets that the yen will continue to weaken – ahead of a December 16th general election, some forecasters are beginning to predict a possible strong rebound should the new government not be able to immediately deliver on its pledge to weaken the currency further. A rebound could send the yen back towards its 200-day MA, currently at 79.60, before year end.
Commodity Currencies – The commodity linked currencies are generally flat this morning as financial markets remain within recent ranges. Raw goods are higher with crude oil rising to $89/bbl, gold gaining to $1714/oz, and copper at $363/lb. The CAD gained modestly overnight after positive Chinese manufacturing data reflects a general improvement in the world’s second largest economy. Gains have however been tempered by the disappointing ISM manufacturing data out of the US – Canada’s main trading partner. The MXN also gained marginally after a report showed that peso remittances were $1.78B in October compared to $1.91B a year earlier. Remittances are Mexico’s third largest source of foreign capital flows after auto and oil exports, and thus the continued strong reading of cash flows, and improved data out of the US, provides support for the peso. Meanwhile, the AUD is little changed ahead of an RBA meeting scheduled for later this evening. Investors are widely expecting the Bank to cut rates as low as 3.00% as policymakers struggle to kick-start the Australian economy. Despite an impending cut, Australia’s G-10 leading yields, relative stability, and coveted AAA sovereign debt rating remain highly attractive to investors.
RMB –The Chinese yuan is stronger against the dollar with the release of positive November PMI data. Headline PMI increased by 0.4 percentage points to 50.6 in the month of November. The data suggests that manufacturing continues to improve at a gradual pace, eliminating some concerns about the risk of changes by Chinese policymakers. Continued improvement in forward-looking indicators should put the policy makers at ease while waiting for the Economic Working Conference held later this month. The yuan is expected to remain within its recent ranges for the upcoming week.