USD - America's currency opened strong last week, but steadily lost ground throughout the week, before gaining again at week's end vis-à-vis its major world counterparts, as a mixed bag of economic indicators and US corporate earnings releases, left both US equities and the dollar confused and undulating. An improvement in retail sales (-1.5% in Sep. vs. -2.1% exp.), coupled with an up-tick in inflationary pressures (CPI: 0.2% in Sep. vs. 0.1% prior), conspired with the release of the 9/23 FOMC minutes, which intimated that the Fed's policy bias may be shifting from a risk of growth towards a risk of inflation. The greenback weakened as investors moved into higher-yielding assets, causing the DJIA to break the psychologically and technically significant 10K level for the first time in over a year, amid a string of positive earnings releases from Goldman Sachs, Google, and others. Nevertheless, a high unemployment level in the US, evidenced by initial jobless claims remaining persistently above the recession-level of 500K (514K for 10/10 vs. 524K prior) gave market participants little over which to cheer. Moreover, an unexpected drop in the University of MI Consumer Confidence Index (69.4 in Oct. vs. 73.5 prior) coincided with the release of Friday's disappointing Q3'09 results from Bank of America and General Electric, exacerbating safe haven flows back towards the USD. Currency markets will likely continue to look towards risk sentiment as the catalyst for price action, which may amount to continued strength for the safety-linked USD in the near-term, as markets continue to digest economic data. However, in stark contrast, the closely-watched NAHB housing market index is expected to increase for the fourth consecutive month in October, which is likely to encourage an improved outlook for the world's largest economy as policy makers see the nation emerging from the worst recession since the Great Depression.
EUR - The euro remains near its highs of the year vs. the dollar. The euro reached overnight peaks at 1.4959, just shy of Friday's year highs at 1.4967, as the currency marches towards the $1.50 level. Aiding the euro's rise last week, Industrial Production rose 0.9% in August, climbing in into positive territory from -0.3% previously. The euro continues to benefit from signs the Euro Zone recovery remains intact. Amid an environment of easing risk aversion and near zero US interest rates, the single currency stands to mark further gains against the dollar.
GBP - Sterling benefited from USD weakness and rose 3.5% for a session high of 1.6271, its highest level since late September. The pound posted its biggest weekly gain in more than four months against the euro as reports added to confidence that the economy is showing sufficient signs of a recovery for policy makers to pause asset purchases. The GBP/USD rose after unemployment rose less than forecast in September. Policy makers, though unlikely to stop purchases, may pause to give themselves the option of doing more later. Signs of returning consumer spending were evidenced by Burberry Group Plc, the U.K.'s largest luxury goods maker, reporting second-quarter sales growth of 4.6%, helped by store openings and a weak pound, and said licensing revenue would shrink less than expected. Expect the pound to remain buoyant against the USD. JPY - The Japanese yen moderated, rising back above 90, on signs of a mixed economic picture. The yen weakened to 91.12 overnight, just short of Friday's 3-week lows vs. the dollar at 91.33. The yen gave back recent gains last week after below forecast August Capacity Utilization and Industrial Output reports at +2.3 (vs. +3.9 forecast) and +1.6 (+1.8 forecast), respectively, dimmed recovery hopes. The Tankan report of economic conditions also fell to -35 in October from -33 previously. The
yen's recent impressive gains are likely to moderate as the economic recovery remains tepid and with interest rates near zero.
CAD - The loonie continued its ascension last week vs. the USD seemingly unabated until Friday's session when the currency saw some retracement on profit taking and a general fatigue in the buying frenzy. The loonie ranged down 2.3% to a low of 1.0209 before giving back nearly 1.5% of those gains to settle at 1.0349 on the week. Crude oil was virtually unstoppable rising 8.6% on last week's session for a year-to-date high of $77.70 a barrel. Canada's consumer prices fell for the fourth straight month in September, the longest stretch since 1953. The Bank of Canada has said it will keep its key interest rate at a record low 0.25% through June 2010 unless the inflation outlook shifts. Expect a strong loonie to continue its proxy with equities & commodities.
MXN - The peso benefited from strong moves in commodity and higher yielding investments. The peso saw a 2% gain to mid-week for its lowest level since August at 13.04 before giving back 0.5% of those gains to settle at 13.10 for the week.Banco de Mexico kept its overnight lending rate unchanged at 4.50%. Mexico's peso strengthened on growing confidence of a global economic recovery and on speculation Congress will approve the government's budget deficit-cutting proposals. Mexican President Felipe Calderon may get enough of his tax-increase and spending-cut proposals passed in Congress to stave off a credit-rating downgrade. While opposition parties will likely reject a 2% consumption tax proposal, a key component of Calderon's plan, the government's decision last week to liquidate a money-losing state power company may generate savings that make up for that revenue. Expect the peso to continue its proxy with investment sentiment for higher yielding and riskier assets.
CNY - The Chinese yuan was nearly unchanged vs. the dollar at 6.8267. A senior Chinese official commented that the economy grew more than 7% in the first 3 quarters of 2009 and will meet its 8% growth target this year. Chinese will report 09Q3 GDP figures Thursday. Markets are forecasting the yuan to rise 3.65% over the next 12-ms.