Overall: The dollar strengthened on Monday, along with the Japanese yen, as equity markets retreated due, in part, to profit taking and traders moved back to safer assets. The dollar weakened across the board last week and the moves may be seen as overdone so a pullback of some magnitude was very likely. Last week’s economic calendar was loaded with top tier releases which, for the most part, indicated that the global economic downturn may be close to reaching a bottom leading traders to move out of the greenback in favor of higher yielding assets. This week’s calendar is not as busy but still has important U.S. data scheduled to be released including trade balance, retail sales, PPI and CPI.

Today’s calendar was empty, except for Canadian house prices which came in as expected, which allowed the dollar to strengthen unhindered against all of the major currencies except the Japanese yen. Lower equity and commodity markets helped the dollar against the Australian and Canadian dollars. Cable retreated as U.K. stocks dropped and on speculation the U.K. economy is worsening while the correlation between the yen and equities returned pushing the pair lower.

The Euro (Eur/Usd) Although the euro weakened, the pair only managed to recover approximately 25% of the pips gained on Friday. The euro lost almost 65 pips on the day but managed to hold above the 1.3550 level and above all of the daily simple moving averages. We may see the pair struggle to break higher if there is a carry-over effect into the Asian session and because there are no economic releases from the euro-zone scheduled for tomorrow
The Pound (Gbp/Usd) Cable dropped on Monday, falling back to the 1.5100 area as traders speculated that the U.K. recession is deepening. Expectations are that tomorrow morning’s economic releases will show house prices and manufacturing production weakened which, if correct, will likely put additional pressure on the pound. Negative comments from HSBC helped push the FTSE lower, which, in turn, weakened the pound. The pair lost approximately 100 pips on the day.

The Aussie (Aud/Usd) The aussie lost approximately 100 pips on Monday as falling equity markets and lower gold prices hurt the Australian dollar. The pair had risen six consecutive days, until today, on positive Australian economic news and a weakening dollar as the global economy shows signs of recovering. The pair gained 370 pips last week breaking above the 0.7700 level for the first time in almost six months.

The Cad (Usd/Cad) The Canadian dollar weakened on Monday as crude oil and equity markets dropped as traders took profits. Equity markets have risen sharply lately as has the price of crude oil, so a pullback was in the cards and the Canadian dollar followed suit. The Canadian dollar has risen for six straight weeks against the greenback and that may continue as this week unfolds and important economic data hits the wires. The new housing price index (NHPI) came in at -0.5% this morning, in line with economists’ expectations.

The Swissy (Usd/Chf) The swissy rose on Monday as the dollar strengthened against most of the other major currencies, but the higher movement was limited, gaining 50 pips on the day, in contrast to Friday’s moves that saw the pair lose 250 pips. The Swiss economic calendar is very light this week and nothing is scheduled for release until the end of the week. The pair closed Monday’s trade just below the 1.1100 level.

The Yen (Usd/Jpy) The yen dropped 120 pips on Monday as the Japanese currency strengthened in response to lower equity markets and traders moving out of riskier, higher yielding assets. The pair closed the day close to the 97.50 level after breaking below the 20, 50 and 200 day simple moving averages which have converged. There are no Japanese economic releases scheduled for tonight’s Asian session but leading indicators and preliminary machine tool orders will be released in the morning. However, they are lower tier releases and should have little effect on the Japanese currency.