Signs of weakness in Asia and a lack of conviction over the size of next week’s Federal Reserve offering clashed head-on with resolution in Europe over a binding solution within two years to head-off the next debt crisis. No wonder the dollar’s fortunes where mixed ahead of a report later this morning likely to show a pick-up in the pace of third quarter GDP.
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U.S. Dollar – Buyers flocked to the dollar during the European morning session lifting the dollar index to 77.75. As New York awakens, dollar demand has paused leaving the index higher by 0.3% at 77.53. Dealers expect growth for the three months ending in September accelerated to a 2% pace, which remains insufficient to recreate jobs lost to the recession. Still, signs of a thaw in the labor market emerged this week as initial claims fell to a three month low.
Japanese yen – Overnight in Tokyo dealers continued to find solace in the yen after a raft of data suggested that a slowing economy was feeling the pinch of a tougher business climate. As the yen strengthens, it harms the outlook for exporters facing dwindling demand. As the threat to the global economy rises, dealers buy into the safety of the yen, reinforcing further problems for the nation. The yen is set to conclude its sixth straight monthly gain against the dollar. A manufacturing PMI survey from Nomura and JMMA today indicated a continued contraction in the sector as the index came in well below the breakeven reading of 50. Finance Minister Noda told regional subordinates that risks to growth are rising. There remain no signs that he’s ready to follow-through with his repeated promise to take “bold action” in the currency market. Consumer prices (excluding food and energy costs) slumped by 1.5% in the year through September across the nation while industrial production contracted by more than three times the forecast decline for the period. Construction orders also shrank. The yen also surged per euro to ¥111.93.
Aussie dollar – The Aussie dollar pared a deeper decline following a lackluster report showing consumer and business credit was weaker than forecast. RBA data showed a mere 0.1% expansion in credit for September leaving the measure higher by 3.3% on the year. Dealers continue to nail shut the coffin on an interest rate increase at next week’s Reserve Bank meeting. The weakness in broader regional economic data, including a dip in South Korean production, harmed the Aussie forcing dealers to pare positions ahead of the weekend. The unit slumped to 97.07 U.S. cents before recovering to 97.44 cents. Against the rising yen, the Aussie slipped to ¥78.67.
British pound – A GfK/NOP consumer confidence reading rose making fools of analysts looking for a deterioration. But the forecaster warned that future readings would soon begin to wane as and when the consumer began to see and feel the weight on the economy from significant government spending cuts. Although the pound deteriorated against the dollar to $1.5926 it rose per euro to 87.00 pence. Central bank data showed a mixed picture for credit expansion for September. Consumer credit grew while homeowners borrowed less against the value of their homes. Mortgage approvals remained static and are running at about half the level of peak times three years ago.
Euro – German Chancellor Angela Merkel has persuaded the EU to rewrite the rules in order to create a permanent debt-crisis management mechanism to come into law within two years. Her intention is to prevent the kind of panic that shook markets when investors took fright over the ability of peripheral governments to manage their debt obligations. Today EC President Herman Von Rumpuy admitted that such instability almost proved fatal for the euro. But his observation that the battle was won while the war figures large in the predictions of currency analysts, some of whom argue that the euro will next year fall to parity with the dollar as slowing economies courtesy of fiscal austerity enflame the situation. Today the situation feels different: German and French economies are riding the crest of an economic rebound while peripheral nations are watching yield premiums on outstanding national debt revisit historic heights. For now this matters not as the core of the Eurozone soldiers on. The euro did slip to as low as $1.3838 earlier but has since topped $1.3900.
Canadian dollar – Ahead of monthly GDP data expected to show a rebound from a marginal July contraction, the loonie is just about unchanged and buys 97.85 U.S. cents. Dealers also expect industrial production to continue on a positive path when data is released later this morning.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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