FX:The EUR gained to a three-week high this morning
The US Dollar is lower against most of its major counterparts this morning on the continued sharp rebound in market risk appetite. After Greece averted imminent financial disaster by passing austerity measures needed to secure further aid from the EU and the IMF, investors have shifted capital into higher yielding assets en masse. Equities, commodities and high-yielding emerging market currencies have seen substantial gains overnight, with weak economic data in the US further encouraging the shift. Weekly jobless claims registered a worse-than-expected 428K, and continuing claims pushed above 3700K. Chicago PMI did however register better than expected at 61.1, versus the 54.0 reading that was expected. The congressional battle over the US debt ceiling has also come into focus a day after President Obama urged compromise as the August 2 funding deadline is fast approaching. While an eleventh-hour deal is likely to be brokered, much like last month’s budget debate, fundamental questions will likely remain on how the government plans to reduce its massive debt burden. For today, with stocks and commodities in the black, the dollar will likely remain under pressure against most of its major counterparts and may test its recent lows against the EUR and emerging market currencies.
The EUR gained to a three-week high this morning as markets embraced the Greek vote to pass austerity measures. While releasing the July tranche of bailout funds so that Greece can service its debt obligations is far from a lasting solution, it avoids a disorderly default and buys Eurozone banks time to shore up their balance sheets in the event of an eventual reprofiling. The common currency has also found significant support on increased bets that the ECB will raise interest rates at their meeting next week. The Bank last hiked rates in April, and has since reasserted their “strong vigilance” in regards to inflationary pressures. While higher yields will provide significant support for the EUR in the near term, higher borrowing costs could prove detrimental to the region’s struggling economies such as Greece, Ireland and Portugal further down the road.
Sterling is flat this morning against the dollar, while falling against the rest of its major peers as prospects quickly fade for tighter policy in the UK. The pound fell to a 16-month low against the EUR after a successful Greek austerity vote paved the way for higher interest rates in the Eurozone. British consumer confidence fell by more than expected and mortgage demand is predicted to continue its decline in the third quarter. With the UK economy still lagging after a quarter of contraction to end 2010, and only a modest recovery in the first quarter of 2011, the BoE will likely keep rates on hold for at least the remainder of the year.
The JPY begins the US trading day relatively flat after trading through a volatile overnight session. The yen had remained well supported throughout yesterday, despite the boost in investor risk appetite, but has since pared some of those gains. However, with attention now shifting from the Eurozone to the US’s struggles with debt, the yen will likely remain towards the higher end of its ranges in the near term.
The Commodity Currencies rebounded from recent lows overnight as gaining investor confidence benefitted the group of high-yielding growth-sensitive currencies. Oil continued to gain, pushing above $95/bbl, gold was flat at $1510/oz and copper was up to $425/lb. The CAD climbed for a fourth day against the USD as the price of oil, Canada’s main export, continued to rise, and Canadian GDP registered slightly better than expected. Economists had forecast a 0.1% contraction in the Canadian economy, but the government report showed that growth was flat at 0%. Unlike their G10 counterparts, Canadian officials have had the luxury of relatively low inflation over the past 12 months, allowing policymakers to keep interest rates on hold at their current 1%. However, after yesterday’s CPI report showed a marked increase in price pressures, bets have increased that the BoC will raise interest rates sooner rather than later. The risk-on rally has also benefitted the AUD, with it gaining by more than half a percent against the USD as investors reduce bets that the RBA may cut interest rates on reduced global growth prospects. The Aussies G-10 leading yield still draws significant investor demand when investors aren’t focused on looming debt defaults. The NZD gained to a record high overnight after a government report showed that business confidence surged last month after falling to a three-year low in the prior reading. With the risk rally in full swing this morning, the commodity currencies will continue to outperform their peers.
