USD - Risk trends were once again the predominant drivers that dictated currency market movement throughout last week and this morning. A trickling of sanguine economic data, notwithstanding, the greenback ended last week as a beneficiary of safe haven flows due primarily from uncertainty stemming from the fate of CIT Group, a large NY-based commercial lender. CIT was denied bailout capital infusion by the US government last week, and was left in a precarious situation that could potentially result in its insolvency. Nevertheless, representatives of CIT announced this morning that a $3B lifeline from bondholders in the form of a bridge loan was forthcoming, which would give the company time to restructure its debt and avoid bankruptcy. On the data front, Advance Retail Sales exceeded expectations (0.6% in Jun. vs. 0.4% exp.), while inflation statistics were suggestive of nascent upward price pressures (PPI: 1.8% in Jun. vs. 0.2% prior; CPI: 0.7% in Jun. vs. 0.1% prior). The manufacturing sector also showed a measurable improvement (Industrial Production Index: -0.4% in Jun. vs. -1.1% prior; Empire Manufacturing Index: -0.55 in Jul. vs. -9.41 prior), while US housing starts showed an appreciable uptick, as well (582K in Jun. vs. 530K exp.). This morning's Leading Indicators Index further lends credence to the notion that The Great Recession has finally bottomed-out and is on a ostensible, albeit very gradual, path toward recovery. Impressive recent rallies in US equity markets, led by strong releases from the financial sector, have bolstered overall risk appetite, and may signal the end of the USD and JPY's benefit from flight-to-quality capital trade flows. Since July 8 the S& P 500 Index firms have announced results that topped forecasts by an average of 15%. Markets will look to a smattering of key economic data this week for further insight into the health of the world's largest economy, and the direction of its currency.
EUR - The euro rose to 6-week highs vs. the dollar as market concerns eased following signs of improving corporate earnings reports last week. The single currency climbed to peaks at 1.4249 from last weeks lows at 1.3895. Improved earnings from JP Morgan and Goldman Sachs last week supported optimism that the banking sector was on the mend which got a further boost after the privately funded rescue of troubled lender CIT Group over the weekend. Meanwhile, Euro Zone growth remains a mixed picture with Industrial Production rising a modest 0.5% in May while inflation at 0.2% in June is well contained. Investor sentiment remains the primary driver of euro direction presently which will keep the single currency subject to swings in investor sentiment as US corporate earnings season continues this week.
JPY - Optimism of a global recovery and improving corporate earnings softened the yen as a safe haven currency, as risk appetite picked up. Positive US data also helped investors increase their yen carry trade positions, in which they borrow in a country with low interest rates and buy assets where returns are higher. The Manufacturer Confidence Index also improved four straight months as exports and output increased, fueling hope that the world's second-largest economy may be recovering from its worst recession since World War II. According to the BoJ's quarterly Tankan survey, Japanese companies forecast that the yen would average 94.85 per dollar in the 12 months to March 2010. Japan's new top currency official Rintaro Tamaki recently said the government would consider stepping-in to sell the yen if an abrupt move hurts the economy.
GBP - Sterling climbed to peaks of $1.6549 amid easing risk aversion and rising equity markets. Last week's reports that UK retail sales climbed 1.4% from the previous year, while inflation at 1.8% annually remains below the BoE's 2% target, raised hopes that the economy is climbing out of a deep recession. Nevertheless, housing remains a drag on the economy as prices fell 12.5% from the previous year. CAD - Last week the loonie strengthened 4.2% vs. USD on improved risk appetite, with the hope that there will be a H2'09 economic recovery. Today the loonie reached its highest level (1.1020/$) in more than five weeks. Helping the commodity-linked currency was crude oil prices, which rose to more than $64 /bbl. Canadian CPI fell 0.3% in June from a year earlier-its first decrease since 1994-though still in-line with forecasts. Data today showed that wholesale sales fell 0.3% to $36.3B, beating forecasts of a 2.1% decrease. International investors bought a net of $17.1B of Canadian securities in May, which is the most in five years. The BoC is scheduled to meet tomorrow on interest rates.
MXN - The peso had its largest weekly gain in nearly two months as speculation mounted that the Central Bank's next interest-rate cut will help support the slumping economy. Despite last week's rough ride for the peso the Mexican Bolsa Index had its first gain in three weeks, climbing nearly 9%. The rise was led by Alfa SAB, whose earnings rose 25% in Q2'09. Unemployment numbers are expected to climb again when the official report is released this Wednesday. The job statistics are expected to reflect the significant waning of US consumer demand for Mexican goods. Since the US is Mexico's largest trading partner, the precipitous decrease in US consumption will have a direct negative impact on the already frail Mexican economy. CNY - The yuan rose slightly vs. USD (6.8311) amid broad dollar weakness. Premier Wen Jiabao said China will maintain a basically stable yuan. Markets are forecasting a 1.31% yuan rise over the next 12- months.