• USD is stronger after disappointing repayment to ECB

  • EUR is weaker ahead of Italian elections

  • Commodity Currencies mixed amid weak CAD data     

USD - The dollar strengthened against both the euro and yen ahead of President Obama’s meeting with Prime Minister Shinzo Abe in Washington.  Aiding the greenback was the announcement of the euro repayment amount from banks back to the ECB, with the number falling below expectations.  The market will look towards the outcome of Italian elections this weekend for further direction into the EUR/USD currency pair.  Analysts continue to be cautious over the risk of a fragmented Italian parliament and the possibility of resurgence from former Prime Minister Silvio Berlusconi.  Next week analysts will look towards the Chicago Fed’s national activity index, the Dallas Fed manufacturing business index, as well as, housing prices and consumer confidence.  Look for the dollar to hold on to today’s gains ahead of the Italian election together with given the focus of a more hawkish tone from the Fed. 

EUR – The euro fell to a six-week low against the dollar after the ECB stated that banks would pay back 61.1 billion euros, less than half the amount expected by the market for the repayment of emergency funding lent during the European financial crisis.  The net result is that the ECB’s balance sheet will be reduced over a much longer period of time.  Unfortunately better-than-forecast German IFO  figures which came in at 107.4 from 104.3 in January did little to boost the currency.  Also weighing on the single currency was a report released from the European Commission that forecasts contraction in the European economy in 2013 along with traders squaring positions ahead of the Italian election.  The report showed that the region will remain in recession in 2013, posting a contraction of ‐0.3 percent, followed by 1.4 percent in 2014.  In terms of the outcome of the Italian election, the best case would be for a coalition between Bersani and Monti.  A more difficult situation would be either a Berlusconi majority in the Chamber of Deputies or a Bersani majority in both houses.  The Market’s consensus is that if Prime Minister Berlusconi wins the majority he would remain as anti-austerity, thus further hurting Italy’s struggle to emerge from its longest recession in 20 years.

GBP – Sterling recovered against the dollar and euro after investors reinvested in the currency amid sharp declines.  This year alone the currency has lost as much as 8 percent against the euro and almost 7 percent against the dollar.  BOE policymaker David Miles, who recently voted to extend quantitative easing said there was a case for restarting monetary stimulus and suggested that the central bank may need to buy up to 175 billion pounds more of government bonds if growth continues to remain weak.  

JPY – The Japanese yen weakened, but held close to recent ranges amid little data out of Japan, pushing the markets to focus on today’s meeting between Prime Minister Abe and President Obama.  The meeting will likely cover free trade

agreements, monetary policy and the overall world economic outlook.  The market will also turn its attention to Abe’s appointment of the next BOJ governor which should be announced in the next week.  With the yen showing signs of losing momentum, look for the currency to hold close to current ranges ahead of the BOJ governor announcement. 

Comodities – The Canadian dollar touched its weakest level against the greenback in almost eight months, after Canadian inflation and retail sales data came in below forecast.  Canada's annual inflation rate in January dropped to a three-year low of 0.5 percent from 0.8 percent in December, while the country's retail sales plummeted 2.1 percent in December. The data suggests that fourth quarter growth may be too soft to add pressure on the BOC to raise interest rates in the near term. The Australian dollar recovered from the broader sell-off in commodities yesterday as safe haven trades were unwound. The AUD/USD made a significant bounce back to settle in above the interbank level of 1.03, retracing a yearly low of 1.0221 seen yesterday. Analysts will be eyeing next week’s CAPEX survey, which is known to have significant importance in estimating business investment for this year and next.

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