Foreign Exchange Market Daily Update

Daily Forex Fundamentals | Written by Union Bank of California | Aug 27 08 14:50 GMT |

The US dollar softened as investors took profit on the greenback's recent rise. Persistent worries about the U.S. financial sector, economic growth, and a rebound in oil prices above $118 a barrel dented dollar sentiment and ignited dollar sales. Federal Deposit Insurance Corp. said the number of problem banks during the second quarter ballooned to 117 with $78 billion in assets, up from 90 banks with $26 billion in assets. Wall Street Journal reported that the FDIC might have to tap Treasury funds to help bail out failed banks. Financial woes overshadowed positive news on U.S. durable goods orders, which unexpectedly rose 1.3% in July after a revised gain of 1.3% in June, suggesting spending improved. Yesterday, the FOMC meeting minutes from August meeting indicated that most Fed members were concerned about inflation and weak financial conditions, but see rate hike as a likely next move, although timing was not mentioned. Thus, expect U.S. interest rates to remain on hold in the near-term while the dollar to remain supported by a weakening global growth outlook.

Meanwhile, hawkish comments from European Central Bank council member Axel Weber boosted the euro. Weber said any talk about interest rate cuts in the euro zone is premature and that a rate hike may be needed once the economic outlook “brightens” in the euro zone. Weber's comments surprised the markets since recent sluggish euro zone data had fuelled hope of a rate cut to avoid a recession. Yesterday, the euro fell to a six-month low against the US dollar after German business confidence slumped in August to the lowest level in three years. News that German economy shrank 0.5 percent in the second quarter, the first contraction in four years, added fears of a recession in Europe.

The British Pound Sterling continues to trade near two-year low versus the dollar on concern that a slowdown in the euro zone economy may have a sharp negative impact on the UK economy as the euro zone is Britain's biggest trading partner. Recent data out of Britain have not been upbeat. UK gross domestic product data revealed that growth stalled in the second quarter. Recession fears will continue to weigh on the sterling.

The Japanese yen benefited from US financial woes and is trading slightly higher as investors unwind carry trades. However, the yen is expected to remain weak on worries that Japan's economy shrank during the second quarter. Bank of Japan Governor Masaaki Shirakawa recently said Japan is expected to remain sluggish due to high energy costs and slowing export growth. Risk aversion is expected to provide occasional support to the yen in the near-term.

The Australian dollar benefited from a rebound in oil gold, metal, and oil prices as Australia is a big exporter of natural resources. However, gains will likely be returned on talk that domestic interest rates would be lowered on September by 25 basis points.

The New Zealand dollar also rebounded, supported by a rise in commodity prices and a survey showing a solid improvement in business confidence, which is good news for the economy. However, the survey also forecasted lower profits and investment, job losses and higher prices in the near-term. The Reserve Bank of New Zealand is expected to lower rates by 25 basis points on September 11.

The Canadian dollar held gains, helped by higher oil prices which rebounded on worries that Hurricane Gustav could disrupt oil production in the Gulf of Mexico. However, the Canadian currency is expected to remain weak as its economy deteriorates. Consumer sentiment is still negative, dented by a sluggish housing market and labor market. Canadian businesses are having a hard time remaining upbeat amid tighter lending conditions and slowing export demand. This Friday, second quarter Canadian gross domestic product will be released. If the data show signs of a possible recession in Canada, it would ignite hope of a rate cut by Bank of Canada on September 3.

The Mexican peso benefited from dollar sales. Mexico's economic growth is expected to slow, but not as much as the U.S. Data last week revealed that the Mexican economy slowed in the second quarter, hurt by lower oil production and weaker exports to the U.S. The U.S. is Mexico's main trading partner.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group
http://www.uboc.com

Disclaimer: This market comment is prepared by Union Bank of California's Global FX & Derivatives Department for the general information of its customers. It is based of the most accurate information currently available, but should not considered investment advise or a guarantee of future exchange rate or trends.