Difficult Road Ahead?

We expect the high yielding currencies to be under pressure today against the USD, as some of the major economic indicators in the Asian region, from China and Japan, today, point to a gloomy scenario for the global economy. There seems to be no relief for China on the manufacturing front, as Chinese PMI shrunk for a third consecutive month in September, the longest contraction since 2009. A lower-than-expected growth in Japanese industrial production in August, coupled with deteriorating manufacturing PMI in September, has reinforced market concerns about the global recovery. Additionally, persisting Euro-zone debt problems, and lack of clarity on the outcome of the Bank of England’s Monetary Policy Committee next week, is expected to weigh on the EUR and the GBP. Moreover, a not too encouraging reading on U.S. consumer spending, scheduled to be released later today, is anticipated to heighten market concerns.

Pound Sterling – UK Markets

The sterling has lost ground against the greenback, after data indicated that GfK NOP consumer confidence index, despite posting a marginal monthly rise this September, was 10 points lower on an annual basis. Earlier this week, the Confederation of British Industry stated that the U.K’s confidence has been undermined this year by inflation. However, market participants are keenly eyeing the outcome of the Bank of England’s Monetary Policy Committee meeting next week. Traders seem to be mostly interested in whether the central bank would resort to further quantitative easing. Yesterday, the pound ended higher against the USD, amid reports that the Swiss National Bank would probably have a higher proportion of sterling assets.

US Dollar – US Markets

The greenback climbed against the major currencies, this morning, as weak economic data in Asia and Germany weighed on investor sentiment. The downbeat economic data included a contraction in China’s manufacturing activity, weaker-than-expected industrial production data from Japan and South Korea and a decline in German retail sales. A decline in Asian equity markets and a weaker start to the European markets have also helped in strengthening the demand for the USD. Moreover, data from the U.S. that is slated to be released later today, is expected to signal a slowdown in the consumer spending growth in August. Other economic releases that take a centre stage today include Reuters/Michigan Consumer Sentiment Index, Personal Consumption Expenditure and Chicago Purchasing Managers Index. Yesterday, economic releases provided an optimistic view about the state of the U.S. economy, with higher-than-expected upward revision of the nation’s second quarter GDP growth and a drop in initial jobless claims.

Euro – European Markets

The EUR has suffered losses against the major currencies, this morning, amid renewed concerns over a global economic slowdown. Earlier today, data indicated that retail sales in Germany registered a greater-than-expected drop in August. Market participants seem to have priced-in a 25 basis points rate cut by the European Central Bank, and anticipate that the central bank might also indicate an increased willingness to expand its non-standard measures in an effort to contain the ongoing sovereign debt crisis in the region. However, higher-than-expected consumer price inflation data in Germany and Spain could make the decision for the ECB a little tricky. Today, traders would be closely monitoring September’s inflation data from the Euro-zone due later today, which is expected to remain unchanged. Meanwhile, the Swiss central bank President, Philipp Hildebrand, stated that policy makers in Switzerland are prepared to use “all measures” to protect the Franc ceiling of 1.20 versus the Euro.

Other Currencies – Highlights

The Kiwi has declined against the USD, after New Zealand’s long-term local-currency rating was cut to “AA+” from “AAA” and its long-term foreign-currency rating reduced to “AA” from “AA+” by S&P, citing the economy's deteriorating external position. The country also had its sovereign debt rating reduced by one notch to “AA” from “AA+”, by Fitch. S&P cautioned that the nation’s external debt position would deteriorate further at a time when its fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth. Meanwhile, the JPY climbed against the GBP, amid speculation that Japanese exporters are repatriating overseas income at the end of first half year ending 30 September 2011. This is despite plans by the Japanese government to raise the size of currency intervention fund by ¥15.0 trillion to ¥165.0 trillion.