US Dollar Softens as European Equities Find Form

US equity markets remained closed overnight in light of hurricane Sandy - now reclassified as post-tropical cyclone - which has devastated much of the east coast, including that of the heavily populated financial hub of New York. With the damage bill estimated to be upwards of $US20 billion, the economic repercussions of the cyclone will no doubt manifest in forthcoming employment and manufacturing data, given the short-term crippling effect on businesses. This Friday's official jobs report will not be affected, given the data was compiled earlier in the month. Likewise, it's expected the effects will boost retailers in the coming months as the rebuilding process begins.

After a strong start to the week, the US dollar softened overnight with risk currencies recording moderate gains, albeit, in light liquidity. A solid performance across European stocks provided a positive setting for Euro gains, but negativity surrounding both Greece and Spain persisted. Still, earnings from Deutsche and BP beat estimates, encouraging strength from European equities. After looking decidedly vulnerable below $US1.29-figure earlier in the week, the Euro managed to regain ground overnight recording highs of $US1.2985, but failed to break out of its current range. Nevertheless, the latest German unemployment survey was less-than-inspiring, with 20,000 newly unemployed in October, twice that of estimates. The official jobless rate for September was revised higher from 6.8 to 6.9 percent, and remained steady in October.

As widely anticipated the Bank of Japan held benchmark interest rates steady at 0.10 percent and increased asset purchases for the second consecutive month. The bank announced a total of ¥11 trillion in additional easing measures, with ¥10 trillion split between longer-term bonds and treasuries. The residual of ¥1 trillion will be used to purchase assets considered of greater risk such as exchange traded funds. In the lead up markets had well and truly baked in another ¥10 trillion of additional easing with scattered predictions they may attempt to use recent downside momentum and ramp up purchases beyond expectations. The ensuing period across Yen denominated pairs reflected this disappointment as investors quickly locked in profits. The USDJPY pair slid in the period to follow before leveling out between the ¥79 / ¥79.5 range, but managed to claw back above short term resistance of ¥79.55 overnight. Earlier, data from the region continued to show sub-par manufacturing activity with preliminary industrial production data showing a 4.1 percent fall in September representing an 8.1 percent contraction from a year earlier.

Overnight, local pundits looked for rates clues from Deputy RBA governor Philip Lowe. In an address to the Commonwealth Bank Australasian Fixed Income Conference, Lowe painted a fairly positive picture of local conditions, noting "Australia has had the highest level of investment, relative to GDP, in over a century, and a further increase is expected." He also acknowledged tentative signs that growth in China has stabilised given the recent pick-up in growth indicators. While conditions in Europe remain uncertain, central bank and government decisions have "lessened the probability of a very adverse outcome." Dr Lowe dedicated a considerable part of the address to Australian dollar, noting the various factors underpinning its strength, despite a softening of commodities considered to be of strong correlative value to the Aussie dollar. While flagging the currency repercussions of accommodative policy from the US, Europe, Japan and the UK, he also pointed out Australia's relative economic strength against that of major economies has underpinned support for the Australian dollar, despite a general softening of the global outlook and a decline in key export prices. "The economy has recorded solid growth, the unemployment rate remains relatively low, inflation is consistent with the target, public debt is low and the banking system is sound."

The Aussie dollar began to grind higher late yesterday in unison with the Euro, with a move to highs of 103.85 US cents overnight. Moderate strength across key commodities and solid gains from European equity markets encouraged buoyancy across the risk spectrum with the Aussie dollar leading the commodity bloc higher. Mid-tier data on the docket today includes September building approvals, private sector credit. From a technical perspective, offers above 103.85 and 104 US cents will continue to provide resistance. A lack of top-tier local releases this week places the emphasis on risk trends abroad, with a clear inflection required to make a convincing break to the upside of 104-figure. Thursday's official Chinese manufacturing PMI may mean the difference between a sustained break of 104 US cents or a steeper descent to the downside of 103 US cents. Conjecture surrounding the health of China appears to have been touch more positive in recent weeks with solid trade data and a stronger flash manufacturing PMI last week providing support for China-contingent currencies such as the Aussie dollar. At the time of writing the Australian dollar is buying 103.65 US cents.