The U.S. Dollar traded higher than most of its Forex peers, but on Monday it retreated slightly against the Euro and the Yen, while benefiting from speculation that the monetary authorities could decide to boost the interest rate at an earlier time than planned. Signs that point to the country's economic recovery reduced appeal for commodities like gold, especially as investors believe the central bank will tighten policy. Other major central banks such as the Bank of Japan and the ECB are likely to adhere to lose policies on concerns over their economies. On the data front, economic reports published on Monday out of the U.S. revealed that Business Activity declined in August, according to the Chicago Federal Reserve's gauge. Its Index posted a drop of 0.2 percent, after printing a surge of 0.39 percent in July. Employment indicators remained neutral, although they showed a slight drop since July. In other news, the U.S. confirmed that sales of Existing Home declined by 1.8 percent in the past month, missing expectations for a jump of 0.8 percent.
And while demand for Gold improved in China in the past few days, the commodity still managed to drop to a nine-month low. Futures for delivery in December plummeted to $1,208.90 an ounce on the Comex Division of the New York Mercantile Exchange, a level not reached since the beginning of January. However, prices gained slightly, causing the precious metal to reach above $1,215.00 a troy ounce during the morning hours of the U.S. trading session.
The Euro pulled away from a 14-month low versus the U.S. Dollar, but continued to feel the pressure as a recent dip in Inflation Expectations gave policy makers more to worry about. The Euro did not have a good week, and there were no economic reports out on Monday. Investors will pay close attention to Mario Draghi, the head of the European Central Bank, as he will speak before Parliament and the Monetary Committee in Brussels. Recent economic news have not helped the Euro, since they continued to be as disappointing as before. Germany's PPI for instance, printed a drop; and the TLTRO, aimed at bolstering bank lending did not meet expectations as the region's financial institutions borrowed less than expected. The British Pound extended its advance against the U.S. currency, days after 55 percent of the Scottish citizens said "no" to gaining independence from the United Kingdom. The Brits have now shifted their attention back to the Bank of England, and hope that Mark Carney, the bank's governor offers forward guidance in his next speech.
The Yen gained some momentum against its U.S. counterpart but continued to trade weakly. In the days ahead, market traders will focus on Japan's Consumer Price Inflation report. Analysts predict that the data may come in unchanged from July's. Meanwhile, the International Monetary Fund amended its global economic outlook and indicated that the world economies will expand by 0.3 percent less than previously estimated since the European economy has slowed down, and Japan's has shrunk dramatically. Many economists believe that the economy is facing the possibility of falling into a recession given that the Yen's decline is reducing the purchasing power of Japanese households and dampening corporate gains. The former deputy governor of the Bank of Japan agreed with this assessment, and added that the Yen's devaluation has been rather "excessive." The currency came close to trading at a six-year low against the greenback and the divergence in central bank policies could increase the rate's volatility. Economists are also worried that the increase in import costs could strain the economy further, while Prime Minister, Shinzo Abe gauges whether the nation could take another sales tax hike.
The Australian Dollar fell towards a seven-month low as a drop in raw materials reduced demand for commodity-related monetary units. The Aussie weakened versus most of the majors as the Bloomberg Commodity Index touched the lowest level in five years due to comments by China's Finance Minister Lou Jiwei, who suggested that the Chinese economy may have come to the "end of the boom," and faces what they believe to be downward pressures. Sources say that the drop in commodities is related to the strengthening of the U.S. Dollar and the fact that China's economy appears to have slowed down. Commodities declined by 12 percent this quarter, and are likely to sustain the largest percentage of losses since the financial crisis started in 2008. In Australia, iron ore extended its depreciation and weighed on the value of the Aussie. In New Zealand, John Key won the majority of votes, in what many have called a "record election victory." Prime Minister Key, who represents the National Party promised the country lower taxes and fewer burdens for business entrepreneurs. His Party obtained 48 percent of the votes in the elections held on September 20th, securing the majority in Parliament. The Labor Party had the worst defeat in decades. The Kiwi has risen on reports showing that the economy advanced at the fastest pace since 2007.
EUR/USD- Draghi Before Parliament
The EUR/USD retreated from the lowest price in fourteen months as speculators eyed Mario Draghi, the President of the European Central Bank, as he appeared before Parliament to deliver testimony about the state of the E.U.'s economy. Mr. Draghi addressed a number of issues such as the latest program aimed at injecting liquidity into the financial system. The EUR/USD remained under pressure on tensions between Russia and the Ukraine despite the "truce" between the two nations. In the Euro-zone, stocks declined after China's Finance Minister prompted a reduction in speculation that his government will expand stimulus. Mr. Lou Jiwei suggested that the Chinese government is not planning on making policy changes despite the fact that growth indicators have all pointed to the downside. The comments not only impacted the commodity prices, but dampened the appeal of commodity-related currencies. In the days ahead, investors will pay close attention to data out of Germany and France. Market traders are interested in seeing whether activities in several sectors have picked up.
GBP/USD- Scottish Vote In Rear-View Mirror
Now that the Scottish Referendum is in the past, investors can breathe easy and no longer have to worry about the possible effects a "yes" vote could have had on the British economy. The GBP/USD rallied on Monday, as speculators are now glued to the news hoping to obtain insight into what the Bank of England plans to do in terms of borrowing costs. The central bank's governor, Mark Carney is expected to speak in Wales on September 25th. Some analysts anticipate there may not be a rate hike for a while, since the G-20 Finance leaders and central bankers who met over the weekend said that growth throughout the world has been "uneven." They indicated that the drop in interest rates could pose a number of risks for the biggest economies which count on monetary stimulus for obtaining growth. The BOE's monetary authorities have also suggested that the deterioration of the European economy could hurt confidence and cause disruption in the financial markets, posing challenges for the U.K.'s economic recovery. Reports due out this week may show that house prices slowed down this month.
EUR/JPY- Euro Erases Gains
The EUR/JPY erased some of its gains as sentiment in the Forex remained somewhat fragile after the European Central Bank attempted to inject liquidity into the financial system, but did not accomplish its goals. Confidence declined after last week's TLTRO only prompted regional banks to borrow 82 billion Euros, which is less than predicted. Meanwhile, in Japan, the monetary authorities hope that the weakened Yen will help exporters, although the benefits may be temporary since the remainder of the world is competing with Japan as the nation implements strategies to fight deflation.
AUD/USD- China Boom Is Over
The AUD/USD slumped, and is predicted to remain to the downside as it continued to trade under pressure due to a drop in commodity prices. Iron ore plunged on Friday to the lowest level in five years due to a decline in demand for steel in China's construction sector. In addition, China announced that the average home priced out lower, denoting a fourth monthly decline. Out of 70 cities that participated in a survey, 68 stated that home prices fell. Only one city posted a hike in property values. Chinese Finance Minister, Lou Jiwei announced that the Chinese economy is facing challenges, but may not consider expanding stimulus.
Today's Outlook
Today's economic calendar shows that in the Euro-zone, France and Germany will report on Services and Manufacturing PMI. The Euro region will also provide data on the Manufacturing and Services PMI. The U.K. will post BBA Mortgage Approvals. The U.S. will release metrics on the House Price Index. New Zealand will announce the Trade Balance. And Australia will issue the RBA Financial Stability Review.