USD - This morning America's currency continues to ride the wave of bullish sentiment that began early last week, rising to multi-week highs vis-à-vis its major world counterparts, namely the EUR ($1.4599) and GBP ($1.6190). In apparent contradiction to the definitive risk trend of the past nine months or so, the dollar was buoyed on the back of a string of positive economic data, not succumbing to the pressures of investor risk appetite: MBA Mortgage Applications (8.5% on 12/4 vs. 2.1% prior); Trade Balance (-$32.9B in Oct. vs. -$36.8B exp.); Advance Retail Sales (1.3% in Nov. vs. 0.6% exp.); Michigan Consumer Confidence (73.4 in Dec. vs. 67.4 prior). The robust data, while ostensibly stoking the flames of a nascent economic recovery, could also be an indicator that the USD is making progress on a true bullish reversal, abandoning its status as a safe haven currency. With the DJIA rallying again this morning-hovering near its YTD high (10,492.05)-markets are exuberant at the prospect that the worst is truly behind. Markets will have plenty over which to ruminate this week with key inflation, housing, and manufacturing data on the docket. The culminating point for the week, however, will be the two-day FOMC meeting which begins tomorrow and concludes on 12/16. While no change in rates is expected during this final FOMC meeting of the year, all eyes will be focused on the accompanying policy bias statement for any clues as to the timing of future rate increases (current Fed Funds Futures are pricing-in a 50% chance of a 25-bps increase in June 2010), as well as any measured changes to the Fed's current policy on fiscal stimulus.
EUR - The euro is near 2 months lows vs. the dollar as the single currency further succumbed to broad dollar strength last week. The euro remains just above its near term lows of 1.46, steadily falling from last week's at highs of $1.4905. Concern over the fiscal health of Eurozone members put pressure on the single currency as Greece was downgraded by credit ratings agency, Fitch. Spain and Portugal were also placed on negative ratings watch raising concerns over mounting deficits in the region. The euro is likely to remain under pressure in the near term as investors balance the fiscal health of E-16 countries versus a resurgent US economy.
GBP - The GBP range-traded between $1.6280 and $1.6330 for the majority of the Asian and European sessions last Friday before sliding lower against the USD during the U.S trading session. The market seemingly ignored softer than expected U.K PPI data for November and it took stronger than expected US economic data to trigger another round of GBP/USD selling. In the UK, a busy schedule on the data front includes the release of a number of house price surveys (Rightmove, RICS & DCLG) as well as the November's CPI, unemployment and retail sales reports. Inflation is expected to tick up again as year-on-year effects impact, though this should not trigger any fears of policy changes as inflation is forecast to drift lower again over the medium term.
JPY - The yen strengthened today after data showing the Tankan large manufacturer's sentiment index came in better than expected. The index rose 9 points in the Q4'09 to -24, beating forecasts of -27. The yen is poised to replace the dollar as the top funding currency for the first time in four months as borrowing rates became almost as cheap as the US. Record deflation prompted the BoJ to start a $113 billion lending program last week, which helped ease demand for private sector loans. Last week, the Japanese government announced a 7.2 trillion yen economic spending package to help stimulate the economy as the GDP only had annualized growth of 1.3%, lower than forecast 2.8%.
CAD - The Canadian currency stared last week on a strong note as investors continued capital flows into higher yielding investments. As the week wore on, however, the loonie saw its fortunes reverse as the markets plummeted on risk reversal back into the safe-haven USD. Crude oil saw its largest dip since early October giving up over 9% on the week ranging from $76.09 to a low of $68.97. The bright spot in Canadian commodities was natural gas gaining 17% on seasonal demand posting a high last week of $5.3640. The main event on last week's calendar was Monday's BoC decision not to raise interest rates form their current record low 0.25%, which helped cement expectations that it will honor a pledge to leave them unchanged through June unless the inflation outlook shifts. While the economy grew 0.4% in Q3'09, less than the Central Bank's 2% prediction, Canada's housing market is staging a strong rebound as evidenced by building permits returning to pre-recession levels.
MXN - Mexico's peso fell the most in three months after a drop in crude oil, the country's biggest export, and declines in U.S. stocks curbed demand for emerging-market assets. However, increased yield expectations may buoy the peso in the coming months. Analysts are projecting that central bank will raise the benchmark interest rate in April 2010 and that inflation rate will reach 5% pushing the peso to 12.900 by year-end. Mexican Finance Minister Augustine Carstens said last week he expects Standard & Poor's to decide against lowering the country's credit rating after the government raised taxes and cut spending to contain its budget deficit. S&P has had a negative outlook on Mexico's BBB+ rating, the third-lowest investment-grade rating, since May on concern that declining oil output would swell the gap.
CNY - The yuan is slightly weaker vs. the dollar at 6.8282. The yuan is expected to remain largely unchanged into the New Year with some calling for it to remain flat until the National People's Congress in March 2010. Markets are forecasting the yuan to rise 2.48% in the next 12 months.
Last Week's Currency Highs and Lows and Forecast
|Currency||Highs and Lows Last Week||Forecast|
|EUR||1.4905 - 1.4586||1.4777 - 1.4566|
|JPY||90.46 - 87.37||89.85 - 87.36|
|GBP||1.6516 - 1.6168||1.6377 - 1.6190|
|CHF||1.0368 - 1.0137||1.0453 - 1.0214|
|AUD||0.9195 - 0.9016||0.9295 - 0.9015|
|CAD||1.0671 - 1.0479||1.0733 - 1.0480|
|DKK||5.1021 - 4.9929||5.1030 - 4.9951|
|NZD||0.7319 - 0.7044||0.7368 - 0.7185|
|MXN||13.0227 - 12.5918||12.9414 - 12.8187|
|SGD||1.3949 - 1.3870||1.3960 - 1.3798|
|TWD||32.320 - 32.146||32.350 - 32.100|
|ZAR||7.6275 - 7.4022||7.6000 - 7.3305|
|12/7||Consumer Credit (October)||-$14.8bn||-$10bn|
|12/9||Wholesale Inventories (October)||-0.9%||-0.5%|
|12/10||Initial Jobless Claims (w/e 5th December)||457,000||457,000|
|International Trade Balance (October)||-$36.47bn||-$36.8bn|
|Federal Budget (November)||-$125.2bn||-$135bn|
|12/11||Export / Import Prices (November)||+0.3% / +0.7%||+0.4% / +1.0%|
|Retail Sales / Ex Autos (November)||+1.4% / +0.2%||+0.6% / +0.4%|
|Michigan Sentiment (December Prelim)||67.4||68.5|
|Business Inventories (October)||-0.4%||-0.3%|
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