The U.S. dollar traded within its recent range against the majority of world currencies overnight, as investors remained on data watch ahead of this week's key U.S. employment report. However, with no major U.S. economic reports scheduled for release today, investors were looking at other reasons to trade. In second tier data, pending homes sales will be watched for fresh signs of weakness in housing - a major worry for the world's biggest economy - that might prompt firmer expectations for the Federal Reserve??™s easing of interest rates. Investors now look toward Friday??™s long awaited U.S. payrolls data for further clues on the Fed??™s outlook on the future of interest rates.
The Japanese yen fell to a five-week low against the euro and a one-month trough versus the dollar overnight as improving risk appetite on the back of firmer stocks prompted investors to chase high-yielding currencies anew. The carry trade is the practice of borrowing low-yielding currencies such as the yen to invest in higher-yield assets overseas. One key driver of carry trade activity has been Japanese domestic investors who, frustrated by low rates at home, purchased higher-return overseas assets abroad. Carry trades will remain at the mercy of risk appetite, but key indices were showing healthy conditions for risk, a scenario that may equate to a weaker yen going forward.
The Euro primary took its cues from other currencies and economies overnight, as markets ready themselves for central bank policy announcements and data releases set for later in the week. Expectations are for the European Central Bank (ECB) to raise interest rates again, possibly as early as June. ECB Governing Council member Klaus Liebscher said monetary policy is on the accommodative side and said euro zone growth is robust. Expect the currency to trade within its recent ranges ahead of the raft of key central bank decisions later in the week.
The British pound touched a one-month high versus the euro and a 2-1/2 month peak against the dollar overnight, supported by growing expectations that the Bank of England could raise interest rates as soon as this week. Recent signs of continuing growth in Britain's housing sector coupled with an unexpectedly strong reading from February retail sales have added to the case for a rate hike from the current 5.25 percent. Such speculation has attracted investors to the currency in anticipation of higher yields in the near-term. England??™s central bank meets Thursday. Data on Tuesday showed that growth in Britain's construction sector accelerated to its fastest pace in nearly three years in the first quarter, providing more evidence of resilience in the housing sector.
The Canadian dollar eased off of its recent highs against the US dollar this morning, as a lack of currency-moving news left traders to trim positions. The currency has been stuck in a one-cent range over the past three sessions and could have trouble breaking out of the band ahead of Canadian jobs data for March due on Thursday. Higher oil prices and speculation about currency flows related to foreign takeovers of Canadian companies have helped drive the currency higher overall but it seems as if these influences are beginning to fade. Oil prices pulled below $65 per barrel, down 1.6 percent, but analysts said this was partially offset by higher nickel and copper prices. Canada exports all three, although oil is generally considered to be the main commodity driver of the currency.
The Australian dollar held its ground near yesterday's decade high against the dollar, ahead of an Australian interest rate decision where investors are betting the Reserve Bank of Australia (RBA) will hike rates to 6.5 percent. Such a move would translate into opportunity to earn higher yields on invested assets. The local currency also eased back on the cross rates against the euro, yen and sterling after meeting long-term technical resistance levels in offshore trade. Financial markets began pricing in a greater risk of an interest rate rise here two weeks ago when a senior RBA official said recent strength in demand, output and wages could push up underlying inflation and the outlook for inflation was higher than ideal. A raft of recent robust economic data, including February retail sales, home-building approvals, private-sector credit and employment, have helped boost expectations of a rate increase.
The Mexican peso rallied on the back of a rally in Mexican equity markets, driven higher by M&A activity. In economic news, analysts watching Mexico's economy see core inflation at the end of this year sharply higher than previously thought, reducing the likelihood the central bank will cut interest rates any time soon. Rising consumer prices in Mexico have been fueled by a succession of spikes in prices for staple foods like corn and tomatoes in recent months. The central bank said in March it expected core inflation to cool, but threatened it could raise lending rates anyway. Some analysts say the central bank comments point to a possible rate hike if inflation expectations and salary negotiations fan consumer prices too quickly ??“ a move that could strengthen the peso in the longer-term.
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