Based upon the weakness in currencies and equities this morning, this quarter could be as challenging as the last. We are moving into the last few months of the year and the first official day of trading in the fourth quarter has started off on very soft footing. The euro fell to its weakest level since early January and came within a whisker of breaking 1.33 while the Canadian dollar fell to a fresh two year low against the greenback.
Despite reports of stronger manufacturing activity in September, investors continue to reduce risk and seek safety in low yielding currencies. They are worried that they will be disappointed by policymakers and economic data and their concerns are justified given recent commentary from central bank officials. The meeting of European finance ministers is currently underway but hope of bailout funds being released to Greece or a decision on EFSF leverage was dashed by European officials who continue to cast doubt that changes to the EFSF have been proposed. We believe that currencies will trade heavy for most of the week as central banks join the Fed's call for easier monetary policies. Despite signs of higher inflationary pressures in some parts of the world, slower global growth and heightened uncertainty is undeniable. The U.S. dollar could be a big beneficiary if we hear any dovish comments from the four central banks meeting this week.
The only economic reports released this morning were manufacturing numbers from the U.S., Europe and Switzerland. According to the Institute of Supply Managers, manufacturing activity in the U.S. accelerated in the month of September. Unlike other parts of the world, the manufacturing sector has enjoyed growth every month for the past year but as encouraging as this may be, the U.S. is a service and not manufacturing driven economy which explains why the impact of the stronger report on the dollar and risk appetite was limited. The ISM index rose to 51.6 from 50.6 thanks to higher prices, increased production, supplier deliveries, customer inventories, new export orders and employment. Construction spending also rose 1.4 percent in August, erasing the past month's decline. In the Eurozone, manufacturing activity was revised slightly higher in September but remained in contractionary territory. The U.K. on the other hand experienced growth in manufacturing which is a departure from Switzerland who saw its manufacturing activity contract for the first time in more than 2 years.
Although the U.S. non-farm payrolls report will be one of the biggest event risks this week, for the time being the focus will remain on Europe. The Ecofin meeting wraps up tomorrow and everyone will be listening in closely for clues on whether Greece will realistically receive its next aid payment by mid October. Also, if an expansion to the EFSF is even mentioned, it could be positive for the euro but if there is no talk of EFSF expansion or leverage, the euro will once again be punished for the market's disappointment.
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