The lack of any comments in support of the USD from the G7 initially drove EUR/USD higher overnight. The EUR, however, has failed to hold its best levels. The fact that the G7 failed to take the initiative with respect to the USD should not really surprise anyone. Not only is there talk that the G7 is becoming sidelined by the weightier G-20, but G7 communiques tend to focus very little on currency market specifics. The G7's remarks that ''disorderly'' swings in currencies markets could be harmful are in tune with its usual rhetoric. Comments from various officials this morning suggest that very little has changed from Friday and the relative strength of some currencies remains a pertinent political topic.
Comments from Japanese Finance Minister Fujii that the government will intervene if the yen moves in a ''biased direction'' suggest that the new government has finally come to terms with its potential clout in the fx market. The JPY unwound its gains on these remarks and its holding close to Friday's close vs the USD and is softer vs the EUR/GBP and AUD. The ECB's Nowotny remarked that ''everybody is observing fx developments'' though he also saw no immediate need for action. French Finance Minister Largarde, however, commented that the strength of the European economy doesn't justify a stronger EUR and reiterated her support of the US Treasury's strong USD policy. Fears of more verbal intervention in support of the USD are likely to limit the pace of any EUR gains going forward.
Better than expected Eurozone PMI services data suggests the Eurozone recovery remains on track. A greater jump was posted in the UK services PMI which rose to 55.3 in September.
The services sector accounts for almost 76% of the UK economy and the acceleration in activity is consequently a significant injection into UK recovery hopes following signs that the improvement in the smaller production sector is losing momentum. Sterling found support on the better UK data, however, cable has failed to hold the 1.600 level this morning. The pound has recovered most of its early morning losses vs the EUR. However, EUR/GBP has failed to break below the 0.9140 level. The BoE this morning announced that in order to help smaller companies manage liquidity it will widen eligibility for reserve accounts. This is part of the process aimed at supporting smaller businesses. No policy change is expected at this week's BoE policy meeting. The start of the UK Tory party conference is focussing attention on the differences between the main two political parties particularly with respect to the UK deficit.
While both parties see the need to reign in the deficit, the Tories appear more committed to initiating spending cuts ahead of the Labour party. A large part of sterling weakness can be related to the huge UK budget deficit. However, fine-tuning when growth is strong enough to start the spending cuts will be a challenge for which ever government takes the reins after the spring general election.
AUD/USD pushed higher overnight as speculation that the RBA could hike interest rates as soon as this week rose. Despite the relative strength of the Australian economy, Treasurer Swan this morning referred to substantial challenges ahead for the Australian economy. In spite of the fact that Australia has avoided recession, fear that the unwinding of fiscal incentives could lessen potential in the coming months suggests that unchanged policy tomorrow remains highly possible.
This afternoon US ISM non-manufacturing data are due.
