• Focus shifts to BoE, ECB meetings on Thursday

  • Weak consumer spending add to poor UK data, hurts sterling

  • Commodity currencies traded lower but commodity prices support


USD- The US dollar fell against the yen on profit-taking after its precipitous rise to a 2-1/2 year high last week but rose against the euro on speculation the European Central Bank could hint at future rate cuts.  Expectations of aggressive monetary easing by the Bank of Japan have seen the dollar rally more than 8 percent versus the yen since early December. However, analysts said investors returning after the holidays with fresh allocations to make this year were taking profit on its rapid ascent.  The single currency should likely remain under pressure against the dollar as markets refocus on the euro zone's debt crisis, and before the ECB meeting later this week. Any indication of monetary stimulus or comments on economic weakness could push it lower.


EUR- The euro has recovered some ground against the US dollar after reaching 3 week lows. The single currency remains on the defensive with last year’s official economic data showing the unemployment rate hitting a new record high and retail sales less than expected.  Market participants hope the European Central Bank will ease liquidity and collateral rules to improve the so-called monetary transmission channel for the economy and lending when they meet this Thursday.


GBP- Sterling weakened against the US dollar and the euro after weak consumer spending data added to concerns about faltering UK economic growth. Data from the British Retail Consortium showed retailers' Christmas sales barely rose, up just 1.5 percent from December 2011, fueling worries the economy may have contracted in the fourth quarter of 2012. The main focus for the pound is how early indications for Q4 (2012) and Q1 (2013) GDP look. With no other major UK data releases today, investors will look to trade balance data to help gauge the UK's economic position. Forecasts are for the trade deficit to narrow slightly. Underlying weakness in the UK economy has also fueled concerns Britain might lose its triple A credit status in coming months. Such a move could be a further setback to sterling, although some analysts have said losses could be limited as a rating cut is already priced in. The pound may also continue feeling pressure relative to the dollar and the euro - both of which could also struggle this year - as worries about weak UK growth undermine its appeal as a safe haven from the euro zone debt crisis.


JPY- The Japanese yen strengthened against the US dollar and the euro as more investors speculate recent gains were too far and too fast even with current expectations for looser monetary policy in Japan.  According to analysts, the yen has room to rebound further in coming days, although gains will be capped by investor expectations that the Bank of Japan will ease monetary policy. However, investors seem nervous of pushing the yen too much lower due to the risk the BOJ may not opt for aggressive stimulus as early as its next meeting on Jan. 21-22. BOJ governor’s Shirakawa, is not leaving until end of March so there is a risk of disappointment.


Commodity Currencies- The Australian and New Zealand dollars slipped against the US dollar and ran into profit-taking on the yen as a two percent gain in one week left the currencies vulnerable for a small correction.  The Aussie was also held back after Australia's trade deficit widened to its largest in five years as imports again outpaced exports. The deficit grew to A$2.6 billion versus forecasts of A$2.3 billion, representing the 11th straight month of shortfalls. However, the recent dramatic rise in commodity prices suggests the worst of the trade pain is over for the resource-rich nation. Prices for iron ore, a major Australian export, have edged up to a fresh 15-month high of $153.90 a ton, a move that has been underpinning the Aussie dollar. The New Zealand dollar edged lower but remained within sight of a 15-month peak of $0.8477 last month. The currency has been a major beneficiary of a global yield pursuit with relatively high interest rates compared with the rest of the world. The Canadian dollar weakened slightly against the US dollar as activity was limited by mixed economic signs from Europe and caution ahead of the North American earnings season. Adding to the sense of risk aversion, market participants cited speculation that France's sovereign debt rating may get downgraded.

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