Overview: September 9, 2014 Need to make a payment? The greenback’s march to new highs overnight made foreign billing a bit more affordable for U.S. importers. The dollar strengthened further below $1.30 against the euro to reach new July 2013 highs. America’s red hot currency was just as strong on a trade-weighted basis, and fared even better versus the yen, hitting six-year peaks. Underscoring the dollar’s broad strength, it scored four- and 10-month peaks against rivals from Canada and Britain, respectively. Factors at home and abroad continue to supply the dollar with its relentless out-performance. Among the domestic factors buoying the dollar are the U.S. economy’s healthier prospects which have the Federal Reserve on course to end stimulus next month and raise interest rates next year. The buck’s advance has also been boosted by a fresh round of euro-weakening stimulus from the European Central Bank and growing anxiety ahead of next week’s Scottish independence vote that has unleashed a host of unknowns to the detriment of sterling. In Japan, the stimulus door remains open after the world’s No. 3 economy contracted more than expected last quarter. On tap today are reports on Canadian housing and the U.S. labor market. GBP Sterling followed up its worst day in years with tentative stabilization from November 2013 lows. In a sharp swoon, the pound shed two cents Monday as a poll showed the pro-independence group of Scots in favor of voting to leave the U.K. Until recently, many had thought the Sept 18 referendum would garner a routine ‘no’ vote. Most remain cautiously hopeful that Scotland will vote to remain in the U.K. The mere specter of a Scottish exit from the U.K. has unleashed a host of unknowns to the detriment of the pound. Among them, would the ensuing economic and financial uncertainty cause the Bank of England to put off an expected rate hike in the months ahead? Would it lead to trade barriers? And which currency would an independent Scotland choose? There are many unknowns which are likely to keep the pound on its back foot in the run-up to the vote. Careful GBP buyers because a ‘no’ vote could see the pound rally just as sharply as it’s fallen. A ‘no’ outcome would help erase some of the uncertainty that has dogged the pound and leave it poised for a relief rally. On the data front, mixed U.K. indicators largely offset and had little impact on the pound. The 0.5 percent rise in industrial output in July was faster than expected and the strongest in six months, but it was largely counterbalanced by Britain’s widest trade gap since April 2012 in July which moved to £10.2 billion from £9.4 billion in June. JPY The yen hit a new October 2008 low against the greenback, hurt by a renewed rise in U.S. Treasury yields, a primary driver of dollar/yen. A Fed survey this week suggested the market might be behind the central bank in gauging the future trajectory of U.S. rate rises. Moreover, many suspect that changes may soon be on the way for the tone of the Fed’s post-meeting statement to help set the stage for a future rate hike. The Fed next meets on Sept 16-17 and is widely expected to scale back its monthly bond purchases, and announce the end game in October. EUR The euro was steady after plumbing new 14-month lows against the greenback further below the key$1.30 level. Policy and economic divergence on the left side of the Atlantic compared to the right side continues to buoy the dollar at the euro’s expense. EUR bears have also been emboldened by the sense that ECB chief Mario Draghi is in their corner as a weaker euro could help officials gain an upper hand in the battle against low inflation. AUD Rising U.S. yields and slower business confidence Down Under had the Aussie dollar at its lowest level in weeks against its buoyant American counterpart. The yield on the U.S. 10-year note climbed to 2.50 percent, diminishing Australia’s yield advantage. Aussie business confidence slowed three points to 8 in August, underscoring economic fragility that’s expected to keep the RBA sidelined on rates for a while. CAD The loonie steadied after hitting May lows against the greenback but it remained vulnerable after Canadian housing starts slowed more than expected to an annual rate of 192,400 units in August. Financial markets were skewed risk averse which serves as another negative for the risk sensitive loonie. USD The dollar took a breather after notching new highs overnight. Underlying sentiment remained positive as markets shrugged off last week’s slower job growth and continued to anticipate better times ahead for the world’s top economy over the remainder of the year. Such optimism has cemented expectations for a Fed rate hike next year, setting the dollar apart from the euro and yen whose central banks may not be done easing policy.
Posted on: Tue, 09 Sep 2014 20:07:36 +0000
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