•             USD is higher on retail sales

•             EUR and GBP lower on new G-7 statement

•             Commodity Currencies mixed on data


USD - The dollar initially lost ground against the euro before pushing higher and pared gains against the Japanese yen after the release of U.S. data.  Business Inventories came in up 0.1 percent, but below expectations for a rise of 0.3 percent.  Also released was data on import prices which rose 0.6 percent, below a consensus of 0.7 percent.  The most closely watched report, retail sales, rose slightly in January and was pressured by the recent  tax relief that expired and higher gasoline prices.  The Commerce Department stated that retail sales edged up 0.1 percent after an unrevised 0.5 percent rise in December.  The release, which was in line with economist's expectations, implied that households were responding to the expiration of a two percent payroll tax cut that went into effect on January 1.

President Barack Obama touched on a number of issues last night in his first State of the Union Address since being re-elected; however, the issue that will be most closely watched will be the creation of new manufacturing hubs here in the U.S.  President Obama not only made an announcement in regards to the creation of manufacturing hubs, but also proposed to lower taxes to 25 percent from the current level of 35 percent for manufacturers, while putting in place a minimum "offshoring" tax.  These measures will be closely watched going forward to see how they will affect overall job and economic growth.

The market will turn its attention to this weekend’s G-20meeting in Moscow, where analysts expect that the G20 will further try to assuage the currency debate, by reiterating the need for central banks to focus on market driven flexibility in exchange rates.

EUR – After peaking above 1.35 in the interbank market after the G-7 statement released, the euro pushed lower after the release of U.S. data.  The push higher on the euro came after a day of mixed messages from the G-7 about exchange rates, prompted by Japan's aggressive expansion of monetary policy, which has seen the yen weaken sharply.  A German government official also tried to put the topic to rest, by stating, "I’m very glad that we have hopefully concluded the question of exchange rates for now ... which all G7 members accepted and I hope the G20 will also accept.”  Look for the EUR/USD currency pair to retrace lower before testing 1.35 again ahead of the G-20 meeting and upcoming Italian elections later this month.

GBP – The British pound fell to a six-month low against the dollar and weakened against the euro despite UK inflation holding at 2.7 percent in January, unchanged for the fourth month in a row and above the Bank of England’s (BOE) target rate of 2.0 percent.  The move also happened on the heels of  the G-7 statement and after BOE’s Governor Mervyn King stated:  “When countries take measures to use monetary stimulus to support growth in their economies, then there will be exchange rate consequences and they should be allowed to flow through." 

Look for further losses on the pound amid the growing concern over additional asset purchases and monetary easing later this year.

JPY – The Japanese yen retraced its looses during early trading, but ultimately weakened after an official with the Group of Seven expressed concern over excess moves in the Japanese currency.  The move came as the G-7 tried to calm markets and clarify yesterday’s statement, saying that it "is concerned about unilateral guidance on the yen.”  The market, however, interpreted the statement as a sign that the G7 supported Japan's moves, prompting a move higher in the currency initially.

Look for Japan to address the weakening yen at the G-20 meeting.  Japan's top financial diplomat said that they will reiterate to the group of 20 nations that its push to revive the economy with aggressive monetary expansion will benefit other nations and outweigh any possible negative effects.

Commodity Currencies –The Canadian dollar weakened with markets expressing concerns over the state of the housing market with the country experiencing a moderate slowing in housing activity.  The market will keep a close eye on employment and interest rates as key drivers for housing.  With no data due out today, analysts will turn their attention to the G-20 meeting.  Look for USD/CAD to remain range bound above parity.

The Australian dollar rebounded from four-month lows after the release of upbeat domestic data and global commodity prices.  Australian consumer confidence rose to its strongest level in 26 months.  The poll of 1,200 people by the Melbourne Institute and Westpac Bank showed its index of consumer sentiment climbed 7.7 percent in February.  Look for the AUD to hold close to current levels, but potentially see a move lower with the Reserve Bank of Australia (RBA) leaving room for further monetary easing.  Markets will be pricing in a one-in-three chance of a rate cut to a record low of 2.75 percent in March.  The New Zealand dollar also regained ground after Finance Minister Bill English said New Zealand could not afford to intervene in the financial markets to lower its currency.


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