Poor economic data out of the U.S. increased demand for safety, thereby benefitting the U.S. Dollar. According to the Institute For Supply Management, the index fell to 49.7, indicating that Manufacturing contracted for the first time since the nation came out of a recession three years ago. Analysts believe this means that one of the economy’s main sector is faltering –a factor that decreased risk appetite in the markets. Part of the report which indicates “Prices Paid” also revealed a big drop, from 47.5 to 37.0, another piece of evidence that may convince the Federal Reserve to implement a third round of quantitative easing. The Markit Manufacturing PMI also showed a decline as the index posted a 52.5. The only positive news was from a release showing that Construction Spending rose to 0.9 percent even though a dip of 0.2 percent had been forecast. The greenback remained little changed versus the Canadian Dollar as concerns over the new measures announced by E.U. leaders last week dampened appetite for risk currencies. USD/CAD trading remained light as the markets were closed in Canada in observance of Canada Day.
The Euro weakened against the U.S. Dollar despite lackluster reports showing that Manufacturing contracted in the U.S. for the first time in 36 months. Market investors are worried that the measures yielded by the two-day E.U. summit won’t solve the debt crisis especially since Finland and the Netherlands oppose the idea of allowing the European Stability Mechanism to buy bonds in the secondary market. At the end of the Brussels summit, the Euro-zone’s leaders agreed to utilize the bailout funds to help struggling banks and to buy government debt in an effort to keep borrowing costs down. The Euro experienced a massive sell-off following the release of the Unemployment Rate which showed a hike to 11.1 percent. And although the percentage was just as expected, it was the highest level of unemployment on record. The British Pound traded lower versus the U.S. Dollar following disappointing Manufacturing reports out of the U.S. which increased flight to safety. The Sterling gained the most in two weeks against the Euro following news that Finland and the Netherlands oppose allowing the region’s permanent bailout fund to buy government debt. This increased fears that the measures put forth at the summit may not materialize.
The Yen gained on Monday despite the outcome of the E.U. summit. News that Finland and the Netherlands oppose the idea of the ESM purchasing bonds from a secondary market caused investors to worry this may prompt borrowing costs to rise once again. The Yen continued to strengthen on stronger than anticipated economic data and an increase in risk aversion.
Lastly, the Australian Dollar traded close to a two-month high on wagers the central bank will leave interest rates unchanged. However, demand for the Aussie dipped after an industry report showed that the country’s Manufacturing contracted last month. The New Zealand Dollar rallied the most in three weeks versus the greenback as Asian stocks climbed.
EUR/USD- New Measures May Be Blocked
Of all the data issued on Monday it was the Unemployment Rate, which reached a record high of 11.1 percent, that weighed the most on the shared currency. The Euro was also affected by news that the Netherlands and Finland would stop the European Stability Fund from purchasing bonds in secondary markets –a fact that raised worries the summit’s agreements may amount to nothing. The only positive reports came from the bond markets where Spanish and Italian 2-year bills yielded 13 points less each. Other releases indicated that Manufacturing PMI increased from 44.8 to 45.1; German Manufacturing also gained from 44.7 to 45.0, through Italy’s and France’s Manufacturing contracted as forecast.
GBP/USD- Manufacturing PMI Up
In The U.K., reports showed that Manufacturing PMI climbed more than forecast. According to the index, Manufacturing expanded from 45.9 to 48.6, diminishing somewhat the likelihood the Bank of England may opt for further asset purchasing. However, pessimistic comments from the governor and bank officials still indicate the bank may consider another round of quantitative easing. Other reports revealed a dip in the Hometrack Housing Survey and a slip in the Lloyd’s Business Barometer.
USD/JPY- Yen Rises On E.U. Concerns
The Yen rose as worries over the Euro region’s debt crisis persist. Japan’s currency gained versus the greenback after market sentiment cooled amid worries over the effectiveness of the measures announced on Friday after the E.U. summit. On the economic front, the important Tankan Survey showed a surprise improvement in the second quarter, with the index’s Large Manufacturers outlook rising well above predictions in the month of June. According to official data, it posted at 1 despite the fact that analysts anticipated a reading of -4. The Yen rallied against the majority of its peers after the Institute for Supply Management’s U.S. Factory index shrunk for the first time in 3 years. The Bank of Japan’s Deputy Governor, Hirohide Yamaguchi, recently stated that the Yen’s gains were prompted by the crisis in the Euro region and may hurt the nation’s economy. Analysts believe his statement suggests the bank may implement further monetary easing when it meets next.
AUD/USD- Aussie Steady On Dimmed Hopes
The Australian Dollar traded steady versus the U.S. Dollar as investors speculated the measures announced by E.U. leaders on Friday may not be the solution to the debt crisis. The Aussie Dollar gained on wagers the nation’s central bank will leave the interest rate at 3.5 percent in order to maintain the yield advantage of Aussie assets. However, the currency’s gains were limited as economic data showed that Manufacturing contracted in June due to the implementation of a new pollution tax and as reports out China confirmed that the Purchasing Manager’s Index slipped from 50.4 to 50.2 last month.
Today’s economic calendar shows that Australia will release data on Retail Sales, the RBA Rate Statement and the Interest Rate Decision. The U.K. will report on Construction PMI, Mortgage Lending and the BOE Consumer Credit. The U.S. will publish Factory Orders.