Published: Mon, 16 Feb 2009 16:53:12 +0100

Mid-Morning Market Recap: USD Moves Higher with North American Markets Closed

(CEP News) - Low volume and weaker equities are helping to boost the U.S. dollar, making it one of the top performers on Monday.

U.S. markets are closed in recognition of the Presidents' Day holiday. U.S. equity futures at the CME will close alongside European markets at 11:30 a.m. EST.

U.S. equity market futures are lower, with contracts on the Dow Jones Industrial Average down 52 points to 7727, the S&P 500 down 7 points to 813 and the Nasdaq down 14 points to 1216.

European stock markets are also lower, with the Euro Stoxx down 14 points to 1952, the UK FTSE 100 down 29 points to 4161 and the German DAX down 17 points to 4396.

Looking at European fixed income markets, returns on two-year German bonds are down 7.5 bps to 1.24%, with five-year yields down 9.1 bps to 2.14%, 10-year yields down 7.5 bps to 3.03% and 30-year yields down 6.9 bps to 3.63%. The Short Sterling September 09 contract is down 6.0 ticks to 98.47.

Yields on UK two-year bonds are up 3.8 bps to 1.36%, with five-year yields down 0.7 bps to 2.54%, 10-year yields down 5.8 bps to 3.50% and 30-year yields down 2.0 bps to 4.11%. The Euribor September 09 contract is up 2.5 ticks to 98.39.

The weaker equities are helping to increase fear sentiment in currency markets, which is helping to boost the U.S. dollar across the board.

The Canadian dollar is down 0.0070 to 0.8049 against the U.S. dollar ( 1.2424 USD/CAD) and down 0.46 to 73.90 against the yen.

The U.S. dollar is down 0.08 to 91.81 against the yen and the Dollar Index is up 0.440 to 86.481.

The euro is down 0.0068 to 1.2795 against the U.S. dollar, up 0.0006 to 1.5897 against the Canadian dollar, up 0.0009 to 0.8973 against the pound sterling and is lower by 0.81 to 117.47 against the yen.

The pound sterling is down 0.0093 to 1.4262 against the U.S. dollar and down 0.0015 to 1.7720 against the Canadian dollar.

The only data releases in North America on Monday were Canadian manufacturing shipments and international securities transactions. Both reports highlight the grim state of the Canadian economy, but still had little impact on currency markets.

Foreign investors reduced their holdings of Canadian securities by nearly twice the amount economists had expected, Statistics Canada reported. International investors removed $2.835 billion in Canadian securities from their portfolios in the month, compared to expectations for a decline of $1.4 billion.

Meanwhile, Canadian manufacturing shipments dropped sharply in December, the steepest fall since 1992, according to Statistics Canada. Shipments fell 8.0% against expectations for a 5.3% drop, the statistics agency reported.

Although markets shrugged off the data, Ashraf Laidi, chief market strategist at CMC Markets, said he is expecting the figures to have a longer-term impact as USD/CAD continue to trade near the 1.2500 CAD level. However, he is not expecting the cross to break through that strong psychological barrier.

Neil Mellor, currency strategist at Bank of New York Mellon, said that with little direction for currencies, he is expecting equities to continue to lead the FX markets and for the U.S. dollar to continue to strengthen.

While markets remain volatile, Mellor said he is still expecting most currency crosses to remain range bound. He expects EUR/USD to continue to hold support at 1.2700 and resistance at 1.30.

Currency strategists at Citigroup said the sterling is also holding key support levels against the U.S. dollar and could turn higher in the short term. They are looking for the cable to hit resistance at 1.4606 USD.

The Japanese Yen has also benefited from risk aversion sentiment, and it remains higher across the board. The CAD/JPY is down 0.51 points to 73.84, the USD/JPY is down 17 points to 91.71 JPY and the EUR/JPY is down 0.89 points to 117.38.

Weaker fourth-quarter Japanese GDP has helped to boost the yen in risk aversion moves, according to currency strategists.

Japanese growth shrank sharply in the fourth quarter, marking the third consecutive month of GDP contraction, as the world's second-largest economy falls deeper into recession. GDP fell by 3.3% quarter-over-quarter, compared to economists' expectations for a 3.1% drop. On an annualized basis, GDP fell by 12.7%, against expectations for an 11.6% decrease.

All data taken at 10:48 a.m. EST

By Neils Christensen, neilsc@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca