February 8, 2010
Daily outlook
The U.S. dollar skyrocketed to a seven-month high against a basket of its major rivals overnight, broadly supported by heightened concerns about sovereign credit risk in the euro zone and a steep drop in investors’ appetite for risk. During times of economic and financial market uncertainty, low yielding currencies like the greenback and yen tend to act as safe harbors. The cost of insuring Greek, Portuguese and Spanish bonds soared to new record peaks again overnight in a sign that investors are increasingly worried about their ability to payback burgeoning debt. The single currency’s appeal has been dented by mounting debt concerns and by the view that tighter fiscal policy in many euro zone nations, which will be needed to narrow swelling budget gaps, will ultimately postpone the ECB from normalizing monetary policy.
A steep selloff in equities, which saw the Dow Jones fall to its lowest since October yesterday, fueled additional safehaven gains for the greenback. Investors await key U.S. jobs data for January at 8:30am this morning. A positive print for non-farm payrolls could add to the resurgent dollar’s impressive momentum. The Canadian dollar held its own against the USD and was broadly firmer in its major crosses, benefiting from very strong employment figure for January. Strong data and Canada’s exposure to recovering U.S. demand has helped insulate the CAD from the negative impact of cooler risk appetite and sliding commodity prices. Investors will be on the lookout for any potential market moving comments from the sidelines of the G7 meeting in Iquluit Canada.
Currencies outlook
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EUR: The euro tumbled to a seven-month low against the U.S. dollar, back towards a 15-month low against the Canadian dollar and held near a one-year low against the Japanese yen. Investors slammed the single currency on mounting debt concerns in Greece, Spain and Portugal. Those nations, along with Ireland, Italy and others, have seen budget deficits skyrocket amid dramatically lower tax revenues and soaring government spending. Investors have grown increasingly worried about their ability to service and payback soaring debt. While a default or another major credit event in the euro zone is not likely, the euro is likely to suffer from debt concerns for two key reasons. First, governments in the euro zone will be forced to tighten fiscal policy in order narrow burgeoning budget deficits. Greece’s newly announced plan calls for tax hikes and spending cuts at a
AUD: The Aussie remains near a four-month low against the greenback and a five-week low against the Canadian dollar. The AUD was undermined this week by the RBA’s surprise decision to leave lending rates unchanged at 3.75%, confounding expectation for a 25 point rate hike. Monetary tightening in China, Australia’s largest trade partner, also clouded the outlook for commodity demand going forward. Sovereign credit risk and sharply lower stocks and commodities have dampened demand for higher yielding and riskier assets like the AUD. The RBA sounded relatively optimistic in its Quarterly Monetary Policy Statement
CAD: Canada added 43,000 new jobs in January, well above the 15,000 expected. The nation’s unemployment rate surprisingly fell from 8.4% to 8.3%, confounding expectations for a rise to 8.5%. While much of the rise in employment was due to the addition of part-time workers (+41,500), the upside surprised did add to the loonie’s generally upbeat tone, despite the slide in commodities and risk appetite. Additionally, Canada’s exposure to a recovering U.S. has limited its downside risk.
USD: The U.S. economy lost another 20,000 workers in January, worse than the addition of 5,000 jobs forecast. Surprisingly though, the unemployment rate fell sharply from 10.0% to 9.7%. Net revisions to the past 12 months showed that the total number of jobs lost during the recession was 8.4 million opposed to the 7.6 million originally reported. The U.S. dollar slid across the board in choppy trade. The negative print on non-farm payrolls and the net downward revisions dampened some of the market’s recent enthusiasm about recovery.