US Dollar, Japanese Yen Mostly Higher as Risk Trends Drive Trade Once Again
The US dollar and Japanese yen generally traded in line with risk trends on Monday, quelling speculation that the currencies had permanently diverged. On Friday, the US dollar dominated the FX markets as USDJPY ended the trading day up over 2.5 percent following the release of the US non-farm payroll (NFP) report, which surprisingly showed that the labor market only lost 11,000 jobs in November, compared to forecasts for a decline of 125,000. Furthermore, this was the best reading since December 2007, when the US gained 120,000 jobs, suggesting the labor markets may be nearing a turning point.
Given today’s price action, where the US dollar and Japanese yen gained while equities eased back, we’ll be sticking with our original theory that the only economic news the US dollar responds to from a fundamental perspective is NFPs. Looking to the day’s news, comments issued by Federal Reserve Chairman Ben Bernanke during a speech at the Economic Club of Washington, DC reflected cautious optimism. While Bernanke acknowledged recent signs of growth, he stated that “significant headwinds remain,” making it obvious that the central bank isn’t ver the belief that the US is in for a V-shaped recovery.
Related: Discuss the US Dollar in the DailyFX Forum
Canadian Dollar Strengthens as Building Permits Surge Ahead of BOC Rate Decision
The Canadian dollar was the second strongest of the majors on Monday, as the Japanese yen was the only currency to make greater ground. Once again, Canadian data was surprisingly strong as building permits unexpectedly surged 18 percent in October, signaling growth for the construction sector. The positive news we’ve been seeing in recent days has subsequently translated into speculation that the Bank of Canada will issue some hawkish comments on Tuesday. The BOC is likely to leave rates unchanged at 0.25 percent once again, and they should also repeat that they will maintain rates at current levels through June 2010. However, if the central bank issues some upward revisions for GDP or inflation, the Canadian dollar may rally sharply and push USDCAD below 1.0430. On the other if, the Canadian dollar could fall upon the release of the policy statement if the focus is on the appreciation of the currency in recent months as traders tend to respond to verbal intervention efforts, though only on a short-term basis.
Related: Discuss the Canadian Dollar in the DailyFX Forum
Euro Mostly Lower as German Factory Output Declines, Greek Credit Rating at Risk
German manufacturing orders unexpectedly fell for the first time in eight months by 2.1 percent in October due primarily to a sharp contraction in demand for capital goods, suggesting that business investment is waning. Gross fixed capital investment was a positive contributor to German GDP in Q2 and Q3, but if demand for and output of manufactured capital goods continues to fall, there is potential for the figure to hinder Q4 GDP. In other European news, Standard & Poor’s said they had placed Greece’s long-term sovereign credit rating on “creditwatch with negative implications,” indicating that the nation’s A- credit rating could be downgraded for a second time in the near-term. According to S&P, the decision was a reflection of their “view that the fiscal consolidation plans outlined by the new government are unlikely to secure a sustained reduction in fiscal deficits and the public debt burden.” The news creates risks not only for Greek bonds, but also the stability of the euro, especially since Ireland’s rating has already been cut twice this year and there has been speculation that the ratings of Portugal, Italy, and Spain are in danger as well. Furthermore, downgrades would make it more difficult for the European Central Bank to consider raising interest rates in 2010, as Credit Suisse overnight index swap (OIS) rates are pricing in just over 100 basis points worth of rate increases over the next 12 months.
Related: Discuss the Euro in the DailyFX Forum
British Pound Down - BOE Likely to Strike Neutral Tone on Thursday
The British pound backed off against the US dollar and Japanese yen on Monday, though no UK-specific data was released. Looking ahead to later in the week, the Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement. This has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated that they would be expanding their quantitative easing program by £25 billion to £200 billion, but since this was smaller than anticipated, the British pound rallied. This time around, no program changes are expected, and as a result, the currency could gain on the news as traders would price in an end to the BOE’s quantitative easing program.
Related: Discuss the British Pound in the DailyFX Forum
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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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