• USD mixed as market participants await the results of economic data.

  • EUR rebounds as Italian election lifted markets.

RMB strengthens after the announcement of a direct FX swap line with UK.

USD – This week’s focus is mainly centered on politics and central banks. It appears unlikely that there will be agreements for a compromise on the sequester budget cuts by the March 1 deadline, which will weigh on the US growth outlook. Domestically, the ISM index climbed last month, as the index went up by 2.9. Following the large rise, the ISM may move sideways for some time, as recent tax increases begin to dampen demand and take some pace out of the US recovery. The full impact of the tax increases will become clearer when the Michigan consumer confidence index is released later this week. In addition, the PCE inflation for January is due this Friday and as the Fed’s primary measure for inflation, it will be worth noticing. Meanwhile, durable goods orders are likely to fall back this month after a large increase in December. Fed Chairman Bernanke gives his semiannual testimony tomorrow and Wednesday, where he may shed some light on his stand on the current QE program. Minutes from the January FOMC meeting revealed that the discussion of ending the QE program early has been a continued concern due to the costs of expanding the Fed’s balance sheet. Bernanke’s view on the risk and the timing of a QE exit should bring some clarity on the core FOMC members’ position on these issues. The Greenback looks to trade on the bearish side for the week in a broad range of 1.3200 – 1.3350 against the euro.

EUR – The euro rebounded after falling to six week lows vs. the dollar last week as positive signs from the Italian election lifted European markets. The single currency rose to a high of $1.3314 overnight as early election returns in Italy showed the pro-reform coalition well ahead of former Premier Berlusconi’s conservative bloc. Berlusconi has pledged to roll back many of the economic reforms, citing that the difficult austerity measures had plunged the economy into recession and fanned investor concerns ahead of the election. The euro succumbed to worries last week, falling below $1.32, after data from the European Purchasing Manager’s Index (PMI) showed business activity in the region remains in contractionary territory. Further, an IMF report revised growth estimates downward, stating that Europe would not return to growth until 2014. A positive outcome in the Italian elections will likely provide a boost to the euro but gains will remain short lived until the region demonstrates it is on the track towards sustainable growth.

GBP – The pound declined to the lowest level versus the dollar since July 2010 after Moody’s Investors Service cut the U.K.’s AAA credit rating, sapping demand for the nation’s assets. Moody’s cited weakness in the nation’s outlook and challenges to the government’s fiscal consolidation program. The market is anticipating a second downgrade as the Bank of England is expected to resume bond purchases, probably starting with a 25 billion-pound increase in its Asset Purchase Facility. This week brings 4th quarter GDP, which is expected to show a decline of 0.3 percent – putting more pressure on the currency.

JPY – The yen is weaker this morning with speculation the next BoJ governor will be Harahito Kuroda. News agencies are widely reporting that Prime Minister Abe will announce the nomination of Haruhiko Kuroda as the next BoJ Governor and Kikuo Iwata as one of the two Deputy Governors. Both ADP President Kuroda and academic Iwata are well known for advocating that the BoJ should adopt a more aggressive monetary easing policy in an attempt to defeat deflation. The speculated appointments are likely to lead to an ongoing BoJ shift of continued easing which has weighed on the yen in recent months.

Commodity Currencies – The Canadian dollar continued to weaken, hovering near its 8-month low against the USD, after meager retail sales and inflation numbers last week. Investors are looking to an appearance by the head of the central bank for hints of a possible easing in monetary policy, as the weaker economic data discourages the country's growth outlook. The Australian dollar is lower against the greenback after the release of China’s disappointing flash PMI data. The Aussie tends to come under pressure when its largest export partner, China, underperforms market expectations. Domestically, analysts are eyeing the Australian Bureau of Statistics' capital expenditure figures (capex) for the December quarter due Thursday, which will have a large bearing on the prospects of an interest rate cut by the RBA at its meeting on March 5th.
RMB – The Chinese yuan (CNY) strengthened to 6.2871, while the offshore renminbi (CNH) traded at 6.2330 despite the release of PMI figures that weakened to 50.4 from 52.3 in January. Supporting the Chinese currency was the announcement out of the U.K. that stated it will move forward with discussions to set up an FX swap line with China, which will increase the confidence of corporates looking to deal directly with the Renminbi. Look for the yuan to remain near all-time highs against the dollar as the market focuses on an accelerated pace of currency reform.