The US$ fell against the euro, while steadying against the yen and gaining against the pound, as traders gauge market risk and the strength of the relative economies. There is growing speculation that the G8 finance ministers will state at this weekend’s meeting that the global recession is far from over. Yesterday, Luxembourg’s Finance Minister Juncker stated that “we are still in the middle” of a worldwide financial crisis. This speculation about the continuation of the global downturn has prompted some analysts to believe that the US government could be prompted to roll out an additional stimulus package. Should this be the case, we could see risk aversion reenter the market, which should benefit the US$. However, yesterday, we saw a recovery in US equities despite the poor US jobs report released last Friday. This recovery helped reintroduce portfolio risk and led the US$ lower. Overall, however expect the US$ to continue to remain range bound countered by risk assumption and risk aversion arguments. There is no US economic data slated for release today, so expect trade to be defined by the direction of equity markets and trader sentiment.
The Euro gained modestly overnight as traders gradually reintroduced risk into their portfolios and after the release of a report showing that German manufacturing orders climbed at the quickest pace in almost two years in May, prompting Eurozone stocks to climb. German orders rose 4.4%, significantly higher than the 0.5% forecast, prompting some investors to believe that the Eurozone economies might be weathering the downturn better than expected. However, ranges will almost certainly prevail in defining the euro’s direction, until a clearer picture of global growth prospects emerge.
The Yen traded in rather flat ranges overnight as risk continues to define the Japanese currency’s direction. With markets ebbing between risk assumption and risk aversion, so the fate of the yen is defined. As equity market’s slump and worries about economic recovery prevail, the yen gains, the opposite is true when traders begin to put more risk on their books and increase their optimism, prompting yen losses. This trend will continue for some time until markets steady, allowing traders to focus on Japan’s weak economic outlook, prompting the currency to push lower.
The Pound fell overnight after the release of disappointing data in the UK leading some analysts to speculate that the Bank of England will be forced to reduce rates further, perhaps as early as their meeting on Thursday of this week. UK factory orders unexpectedly fell in May, declining 0.5% vs. expectations of a 0.2% increase. This data suggests that the economy still remains in the grips of recession and will likely prompt the BOE to take additional policy steps. With UK unemployment remaining at the highest levels since 1996 and GDP expected to decline in excess of 4.0% this year, there is growing speculation that the BOE will expand its monetary stimulus. This view was reflected by comments from the British Chamber of Commerce overnight who stated that they believe that the Bank should expand its program of quantitative easing. The evidence of a slowing UK economy and the prospect of lower British interest rates will likely weigh on sterling through the remainder of the week.
