The U.S. dollar saw modest gains after initially hovering close to six-week lows against the Euro as investors digested the U.S. midterm elections. The Democrats took control of the U.S. House of Representatives for the first time in 12 years, while the fight for the Senate continues. Democrats need to pick up another two seats to win the majority as the results of two “too close to call” races remain in Virginia and Montana. The election results - thus far - have had little direct effect on the currency markets. With little economic data due out today, look for major currencies to hold onto recent ranges. Continuing to pressure the greenback is the backdrop of interest rate differentials with expectations that the Bank of Japan and European Central Bank are likely to raise interest rates again as soon as next month. The market should begin to focus on tomorrow’s U.S. trade deficit for September, which may have narrowed to its lowest level in two years. Investors will also look towards a speech later today from President Bush that gets underway at 10:00am PST on the heels of the midterm election results.
The Euro initially rose to nearly a six-week high against the dollar, but then weakened later in the European session after market participants digested U.S. election results. In other economic news, German exports showed their largest gain in four years, rising +6.6 percent. The market, however, continues to focus on the European Central Bank’s interest rate outlook with a rate hike planned as early as next month. Look for Europe’s single currency to remain strong with talk of future rate hikes even heading into 2007.
The Japanese yen lost 0.2 percent against the dollar, while EUR/JPY remained flat as Japan’s leading indicator came in as expected at 20 percent in September from its previous level of 18.2 percent. The market will now focus on the potential of a December rate hike from the Bank of Japan.
Sterling remained strong against the dollar with Mortgage lenders nationwide reporting that U.K consumer confidence jumped to a 9-month high in October. The market will start to focus on The Bank of England’s interest rate decision due out tomorrow morning where expectations are for a rate hike of 25 basis points. Look for the pound to remain well supported ahead of the Bank of England’s announcement.
The Canadian dollar fell against its U.S. counterpart, even after stronger-than-expected housing data. Canada’s Mortgage and Housing Corp. said housing starts rose last month to an annualized rate of 223,200 units, from a revised 209,000 units in September. Also affecting the loonie this morning were comments from Deputy Governor David Longworth who stated that the focus remains on national inflation and the country’s target will remain at a midpoint of a 1-3 percent range. With expectations of steady Canadian interest rates and fluctuating commodities look for Canada’s currency to continue to hold close to its recent rages.
The Australian dollar fell after the Reserve Bank of Australia raised rates as expected to 6.25 percent, but failed to indicate the course of future interest rate hikes. Also pressuring the Aussie was a 1.2 percent fall in September housing finance data. The Reserve Bank of Australia’s third rate rise this year was intended to slow inflation which threatened to exceed its 2 to 3 percent target. With the currency’s gains seemingly peaked, look for the Aussie to remain range bound.
The New Zealand dollar was little changed despite Finance Minister Cullen’s comments that the kiwi remained "above the comfort zone,” but that New Zealand’s economy is looking stronger than previously forecast. The market, however, will look to third-quarter employment data due out tomorrow. If the employment reports comes in stronger than forecast than that could be a catalyst for a future rate hike form New Zealand’s central bank.
The Mexican peso remained under pressure this morning as gross fixed income released weaker than expected rising only 8.3 percent. Look for Mexico’s currency to continue to push lower on geopolitical pressure as the leftist guerrilla group, who was responsible for Monday’s attacks on the capital, vowed yesterday that more attacks are to come.
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