Three days of gains for the euro were abruptly halted following signs of a slowdown in economic activity. The dollar snapped back as investors worried by the proximity of a further wave of quantitative easing in the world’s largest economy realized that it might not be the only venue where additional stimulus may be needed.
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Euro – The euro is close to its lowest level of the session standing at $1.3305 and sinking fast. Its third consecutive gain yesterday lifted it to as high as $1.3440 but after taking a look at the round of PMI activity data for September, investors were quick to conclude that the burst of activity witnessed across Europe might be as fast to disappear. Manufacturing and service sector PMI readings dipped sharply leading to a dip in the composite reading for the Eurozone from 56.2 in August to 53.8 this month. The dip was strongly reflected in the performance of German manufacturers where the dip was pronounced. French manufacturers on the other hand continued to see further expansion. Nevertheless, with ongoing labor disputes in the region over spending cuts directly related to restoring balance to fiscal deficits, investors were naturally more cautious today. The euro gave up ground to the yen sliding to ¥112.44.
Japanese yen – The impact of the FOMC statement continues to resonate and leaves the Japanese in an awkward position. The central bank will undoubtedly perform further yen sales should investors push the envelope, buying yen towards ¥83.00. Accompanying a midweek slide in the dollar was a rally for the yen and today’s decline in the euro today justifies another, you’ve guessed it, rally for the yen! The dollar has weakened to ¥83.30 this morning after initial Asian market weakness saw the yen strengthen to ¥84.28, its strongest since intervention occurred last week.
U.S. Dollar – The dollar is higher following a couple of days of extremely heavy selling brought on by what the FOMC had to say earlier in the week. Its index rose to 80.05 in early trading with the greenback only losing ground to the pound, the Swiss franc and the yen. The dollar may remain buoyant in the event that initial unemployment claims suggest improved sentiment in the labor market. Dealers expect no change in the reading following last week’s 450,000 claims.
British pound – The pound continues its unruly behavior. The chart pattern adds little value to the discussion with the British unit recently all over the map. If risk aversion is up overnight then by rights the pound should be lower. But it’s not. From a fundamental basis, suggestions within policy meeting minutes released yesterday suggest the Bank of England is likely to follow the Fed’s lead should it resort to more bond buying. Again, the pound should be weaker. And a shortfall in data showing mortgage lending approvals slumped to a 16-month low would also argue that the pound should be lower. So learn the quirks of this unit from today’s lesson – the pound rose above $1.5700 this morning and is the least well-behaved scholar in the classroom today. It also rose versus the euro, which today buys 85.05 pence.
Aussie dollar – The Aussie yielded to risk aversion today and having failed to improve on a midweek two-year high versus the dollar lost the plot somewhat. The Aussie slumped following weakness in several Asian stock market indices while an unexpectedly weak GDP report from neighboring New Zealand may also have sparked some weakness. The Aussie last traded at 94.90 U.S. cents while it also cheapened against the Japanese yen at ¥80.06.
Canadian dollar – Weakness in crude oil prices as risk aversion mounts is offsetting recent record highs in the price of gold. The loonie slumped to an earlier morning low at 96.39 U.S. cents in early New York trading and despite a rebound still sits near the day’s low.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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