The first week of the new year is packed with important economic events which should help shake off the sluggish holiday trading that characterized the past fortnight. Today's US ISM Manufacturing data is expected to post an improvement from the month prior (exp: 54.0, prev: 53.6), and while we would point to the tentative correlation between better-than-expected US data and USD strength to trade this number, the more significant events for longer-term direction of the USD will come later in the week. The highlights are likely to be Wednesday's release of the FOMC Minutes, and Friday's Non Farm Payrolls and Unemployment Rate. The unexpected drop in US unemployment at the start of November was the catalyst for the recent turnaround in the USD's weakening trend; and since that point the upside surprises in other US data including Retail Sales and CPI have led to further capitulation of USD short positions in the market. Crucially important to the USD's direction from here is the Fed's stance on US interest rates in 2010; a stance that had, until late 2009, been assumed to be one of steadfast accommodative policy for the foreseeable future. Indeed, the use of the phrases exceptionally low and for an extended period within the FOMC statements had underpinned much of last year's USD weakness as investors used this rhetoric as the green light for selling USDs as a funding currency for carry trades. However, the market's assumption that an extended period meant the majority of 2010 was dealt a blow in December by remarks from the Fed's Evans that he interpreted the phrase to mean about three to four meetings. This latest set of minutes from the December meeting may therefore give us a little more clarity on whether the Fed is at all inclined to begin normalizing rates in the coming year, and whether the voting members perceive the recent improvements in economic data as set to continue at the same pace.
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