EUR and GBP rallied after better-than-expected factory orders

• USD is mixed as US trade deficit narrowed

• EUR and GBP rallied after better-than-expected factory orders and manufacturing output

• Commodity currencies are slightly higher despite an aussie rate cut this morning

USD – The US dollar was mixed against most major currencies as the US trade deficit narrowed more than forecast in June to the lowest level since October 2009 after crude oil imports declined and American companies shipped more goods abroad. The gap shrank 22.4% to $34.2 billion from a revised $44.1 billion in May that was smaller than previously estimated. The dollar index, which is the value of the US dollar vs. a basket of six major currencies (EUR, JPY, GBP, CAD, SEK and CHF) slipped 0.13% on the day, increasing the fall over the past 30-days to -1.79%. The recent dollar declines have been attributed to lower consumption, lower construction spending, and weaker non-farm payrolls in July. However, still supporting USD is the speculation the Federal Reserve may reduce its bond purchase program by year end.

EUR – The euro reached a seven week high against the dollar after a report showed Germany’s factory orders rebounded in June more than economists forecast, adding to signs the region is recovering.
German factory orders increased 3.8% from May, when they fell 0.5%, with estimates of a gain of 1.0% in June. The EUR/USD gained 0.2% to trade at $1.3306 earlier this morning. German industry orders posted their biggest rise since October, as contracts for big-ticket items jumped and euro zone demand rebounded, suggesting manufacturing is gradually picking up after a weak start to the year. Recent data has pointed to the domestic economy picking up, with consumer morale brightening, unemployment falling, business sentiment improving and the private sector expanding, though investor confidence has slipped and inflation has picked up. The German economy is in good shape compared with its peers within the Eurozone like Italy, where data showed the economy has contracted for eight consecutive quarters. However, Italy's economy shrank by less than expected in the second quarter, adding to recent signs that its slowdown may be bottoming out. Overall, European shares and the euro strengthened on the news, which extended a run of recent upbeat data and points to an early end to the currency bloc's 18-month recession.

GBP – The British pound reached its highest level in almost 3-weeks after a report showed manufacturing in the UK climbed to its biggest annual gain in overall industrial production in over two years, adding to growth already seen in the service sector, housing market and in retail sales. Britain’s manufacturing output rose 1.9% in June vs. -0.7% its prior month and climbed 2.0% y/y vs. a decline of 2.9% in the prior year ending in June. The GBP/USD is currently hovering slightly over its 50-day moving average of 1.5317.

JPY – The yen strengthened vs. the dollar for the third straight day amid market speculation as to whether the Fed will in fact start scaling back its bond buying program as early as next month. The BoJ will issue both a monetary policy statement and interest rate decision this Thursday, although the central bank is widely expected to continue its stimulus measures, making the meeting somewhat of a non-event. While the yen has rallied over the past couple of sessions, look for the currency to eventually weaken and push back above the key technical level of 100.

Commodity currencies – The Australian dollar rose slightly from yesterday's close despite a decision by the RBA to cut rates. While today's decision to cut rates 25bps to a record low 2.50% was widely expected, there had been some speculation about the possibility of a 50 basis point rate cut. The RBA's statement suggested that it may be shifting from an easing bias to a more neutral policy stance. Regardless, we are seeing some purchasing activity with the AUD/USD now hovering slightly above 0.8950 in the interbank market. Meanwhile, the Canadian dollar is flat today after the release of Canada’s June trade balance data. The trade deficit dropped to C$469 million, beating analyst forecasts of a C$500 million deficit. While this is a step in the right direction for Canada’s export sector, a key driver of the economy, exports have still struggled mightily this year thanks to weak markets and a strong Canadian dollar. Meanwhile, crude oil prices have dipped 1% today, currently trading slightly under $106.00 per barrel.