USD - The greenback continued to remain on the defensive throughout much of last week and this morning as investor sentiment has become increasingly more bullish, elevating the dollar's propensity to fuel carry trade transactions. Moreover, thin trading conditions, leading up to and during, yesterday's US Columbus Day holiday further exacerbated the underlying trend towards dollar weakness. The Dollar ICE Index, which measures the USD's relative strength against a basket of major world currencies, hit a 14-month low last week (73.9113), coinciding with the push to a one-year high of the DJIA (9885.80). Amidst the precipitous decline of America's currency, rumors began to circulate last week that oil-producing nations in the Middle East were in active discussions with Japan, Russia, and other nations, with the specific aim of phasing the USD out as primary payment for oil deals-a move that would seriously undermine the greenback's status as the world's reserve currency. Nascent signs of an early recovery of the world's largest economy were manifested in a trickling of optimistic data releases last week: ISM Non-Manufacturing Index (50.9 in Sep. vs. 48.4 prior); MBA Mortgage Applications (16.4% for 10/2/09 vs. -2.8% prior); Initial Jobless Claims (521K for 10/3/09 vs. 554K prior); Trade Balance (-$30.7B in Aug. vs. -$32.0B prior). With market analysts characterizing the incipient rebound in economic activity as a jobless recovery, Fed Funds futures are already discounting a 25-bps rate increase in Q1'10, while unemployment is forecasted to exceed 10%. Markets will continue to look to commodities and equities for direction on the USD, though data from retail sales, consumer confidence, and the minutes from 9/23 FOMC meeting later this week, will pose an indubitable event risk, hile shedding further insight into the health of the US economy.
EUR - The euro rose to 14-month highs vs. the dollar amid broad dollar weakness and despite mixed economic data from Europe. The single currency rose to highs of $1.4876, as dollar-selling continues on the view that interest rates in the US will remain near zero. The euro is shrugging-off news that Germany's ZEW economic sentiment index declined to -56, the first drop in 3-months suggesting that the recovery will be more gradual. The mixed news follows last week's Q2 GDP report, which although declining a more-than-expected -0.2%, showed conditions were moderating. The Eurozone PMI also rose to 51.1, moving further above he 50 territory separating growth from contraction.
GBP - This morning the GBP traded within one penny of its lowest level in more than six months against the EUR after a business group said that the BoE should expand asset purchases and the inflation rate slowed more than forecast. Last week most UK data surprised to the upside. Halifax house prices showed yet another strong monthly increase. Service PMI beat estimates and rose further to 55.3 in September from 54.1 in August. Nationwide consumer confidence surprised to the upside rising to 71 in September from 65 in August. However, industrial production declined 2.5% m/m in August contrary to expectations of a small rise. BoE refrained from adding to the current asset purchase program and did not lower the deposit rate either, which was in line with expectations. With the current overall improvement in data-and with an expected rebound in eptember-the BoE may refrain from further monetary easing.
JPY - The Japanese yen strengthened slightly against the dollar as investors reversed carry positions due to a fall in global equities. In the past week, the yen strengthened to a 10-month high against the dollar before falling to a 2-month low with speculation that Japan would be among the last developed countries to recover from the global economic crisis. Data last week showed that economic indicators rose 0.8% to 83.3 in August, while machine orders only grew 0.5% despite forecasted growth of 2.1%. The yen remains a safe-haven currency for investors as isk aversion increases.
CAD - The loonie began a measured run against the greenback and continued unabated throughout last week climbing 3.4% to 1.0417-its lowest level since September of last year-on strong commodities, equities, and a general reversal back into riskier investments. The currency market's return to a focus on economic data was evidenced by the rise in Canadian stocks last week led by financials and commodity-linked companies, as an expansion in US service industries in September signaled that economic recovery is spreading. Canadian Prime Minister Harper said last week that the country doesn't have a structural budget deficit. BoC Senior Deputy Governor Jenkins repeated a commitment to keep the key interest rate at a record low 0.25% through June 2010 as policy makers don't expect annual inflation to return to their 2% target ntil Q2 of 2011.
MXN - The peso charted a mixed path last week and was a benefactor of the same type of commodity, equity and risk reversal momentum that pushed the Canadian dollar to its highs. The peso gained as the S & P's 500 Index added 1.5% and the MSCI Emerging Markets Index climbed 0.6%. Concern about whether or not Congress will approve President Felipe Calderon's budget, which includes a plan to raise taxes, will keep the peso from posting bigger gains, while potentially fueling inflation in 2010. Mexico's Central Bank is forecasted to raise its benchmark interest rate by 0.25% to 4.75% in April 2010, according to a median forecast of economists surveyed. Mexico's median economic forecast is as follows; CPI - (MoM 0.57%) - (YoY 4.97%), Fixed Investment (-10% YoY), PPI rose to 0.55% in Sept. from 0.19% in August.
CNY - The yuan dropped modestly vs. the dollar to 6.8265. Markets are calling for CNY to rise 2.44% in 12-months as economic conditions improve.