USD – With the US closed yesterday for the Martin Luther King Day Holiday, and not to forget the presidential inauguration, domestic markets were off to a quiet start. After this, there is a fairly light US economic calendar boding for a calm week, with only a few releases and low Fed activity. The preliminary reading on the Markit manufacturing PMI for January is due on Thursday and it should give some indication of how the US budget negotiations have affected manufacturing activity. The week will also bring housing data today and Friday, when existing home sales and new home sales are released. Existing home sales fell 1.0% to a 4.94 million unit annual rate in December. Tight mortgage lending conditions remain a substantial headwind to a stronger housing market recovery, but the NAR also blamed tight inventories in many markets for restraining sales. However, new home sales are expected to increase, as the housing market continues to strengthen, suggesting the recovery has taken its hold in the market. Market banter on the potential for currency wars has increased. Last week, it was heard by several EM countries, but this week the focus has turned to the advanced economies with comments from both Sweden and Norway focusing on the economic impact of a strong currency followed by comments late yesterday by German Bundesbank’s Weidmann warning that central bank independence is at stake in Japan and that he hopes the international system does not turn towards a race to devalue.
EUR – The euro remains firm vs. the dollar after positive economic news from Germany suggested the economy was emerging from its Eurozone crisis induced slump. The single currency is holding just below $1.33 after German economic sentiment jumped to 2 ½ year highs as reported by the ZEW economic morale index which rose to 31.5 in January from 6.9 previously. The report raised hopes that Europe’s largest economy and engine of growth is rebounding after contracting in the last quarter of the year. The euro was also buoyed after a successful bond auction by Spain. The nation issued 10‐year debt and was met by renewed appetite from foreign investors which accounted for 60% of the investors; another hopeful sign of confidence in the country. The euro is likely to remain supported in the near term as investors gain confidence that Europe is working through its challenges.
GBP – Sterling showed a slight improvement after Monday’s close after reaching a 5‐month low as mixed data out of the UK showed significant improvement in borrowing but unexpected drop in orders. The Public Sector Net Borrowing dropped to 13.2B from the previous reading of 15.3B, beating the forecast of 13.4B. However, Industrial Order dropped sharply to ‐20 points, doubling the expected drop of only ‐10 point. A poor reading from industrial orders is mirroring the low confidence level by UK manufacturers, weakening the growth outlook before Q4 GDP report releases this Friday.
JPY – The yen has strengthened in the aftermath of the BOJ announcement as the markets conclude the BOJ is going to be more cautious than expected. While they agreed to increase the inflation target from 1% to 2%, there was no change to the asset purchase program for 2013. This was disappointing as the market had anticipated a significant increase to the Bank’s ceasing. The announcement is “open‐ended” for 2014, meaning they would not specify the magnitude of the purchases beyond 2013. With expectations so high leading up to the meeting, and a 1% retracement following, it is not unreasonable to expect a continued yen rebound.
Commodity Currencies – Commodity currencies were mixed as some economic data reports eased market sentiment, pushing the price for oil and metals higher. Brent crude rose to $111.74 a barrel, gold was up to $1,694.34 and copper increased to $8,120 a ton as the recent positive data from the United States and China grew confidence in the global economic recovery. The AUD rallied against the USD despite Australia’s slower domestic growth and softening labor market conditions. The AUD/USD is looking to trade in ranges of 1.0585 and 1.0600 this week as inflation data is expected to come in moderate, near the middle of the RBA's 2‐3% band. The Canadian dollar weakened against most currencies despite the BoC's repurchase of C$426M dollars in bonds. Positive domestic data should show some support for the CAD this week from its recent slide lower. November retail sales rose 0.2%; stronger than the median forecast of no change. The rise in total sales was led by new car dealerships and electronics and appliance stores.
RMB – The Chinese yuan (CNY) weakened after the Ministry of Finance announced earlier today that fiscal revenue growth in China slowed sharply in 2012 as a result of the slowing economy, weaker corporate profits and structural tax breaks. China’s national rate of growth dropped 12.2% from a year earlier.
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