USD - Over the past month, data has confirmed that US growth has shifted to a higher gear with growth rates around 4% heading into 2010. That said last week's data has been more mixed regarding the H1 outlook. In fact, it seems as if hard data is picking up, while soft and more forward-looking data has been more mixed. While the November data for industrial production revealed that the manufacturing sector outside autos is gathering speed, the local business surveys indicators have been mixed, so far. Also, in housing, hard and soft data have diverged. The NAHB survey weakened in December, while housing permits picked up in November. Despite the more flattish tendency in permits and starts over the past few months, the outlook is for an increase in residential construction by 15-20% in Q4 and similarly in Q1. The huge slack in the economy is becoming increasingly evident in inflation data. Leaving out auto prices, core PPI and core CPI are clearly trending lower at the moment. Indeed, the November data underpins expectations that core CPI inflation will dip below 1% during 2010. Last week's Fed meeting did not add much new information regarding the policy outlook. The FOMC upgraded its assessment of the economy but did not change the outlook for growth and inflation. Once again, it was communicated that the exceptionally low level of interest rates will remain in place for an extended period. Expectations amongst market participants are that the Federal Reserve will not hike before Q4 '10, but that the central bank will probably begin absorbing excess reserves by the middle of next year.

EUR - The euro saw a steady decline last week on market risk aversion that sent investors fleeing into the USD. The euro began last week on a strong footing of 1.4682 before falling 2.8% to a four-month low of 1.4273. The euro was hamstringed by several factors, not the least of which was the credit rating for Greece being cut to BBB+ from A- by Standard & Poor's. In response Greek five-year government bonds reversed their advance, pushing the yield up 4 basis points to 5.06%. In addition UBS set a target rate for investors to sell the euro against the dollar, targeting $1.39. UBS said investors should end the trade if the euro strengthens to $1.46. Goldman Saks issued the apposing side positing a buy recommendation in the 1.45 range for a move back above 1.50, neither of which transpired. German Chancellor Angela Merkel's government may sell fewer bonds than it expects next year as growth in Europe's biggest economy accelerates. The Federal Finance Agency is set to publish a breakdown of bond sales as soon as today after Merkel's Cabinet approves the 2010 draft budget in Berlin.

GBP - The British pound sterling is trading steady after falling to twomonth lows against the US dollar last week, but continues to be weighed down by weak UK economic data such as November retail sales last week. The highlight this week would be the final reading of third quarter GDP out tomorrow and the minutes to the Bank of England's December policy meeting on Wednesday. The GDP is expected to be revised upward to minus 0.1% from the previous quarter's reading of minus 0.3%. Interest rates are expected to remain at low levels in 2010. The pound sterling will remain under pressure ahead of next year's election as the country is running a large fiscal deficit. Standard & Poor's warned that it will downgrade the UK's AAA credit rating if debt is not reduced.

JPY - The yen continued to stay weak against the dollar as positive US economic data have led investors to believe that the Fed will raise interest rates by the 2H of 2010. With Japan's record low interest rates of 0.10%, investors use the yen for carry trades. Exports from Japan fell 6.8% yearover-year in November and imports fell 17.9%. An index showing all industry activity rose 1.2% month-over-month in October from a revised fall of 0.7% previously.

CAD - The loonie saw mixed fortunes last week ranging from 1.0555 to as high as 1.0739 before closing out the week at 1.0664. Crude oil ultimately gained 8.5% on the week from a low of $68.70 to reach $74.55 before closing the week at $73.36. Natural gas continued to perform as well gaining 13.7% for a high of $5.9180. Positive recovery data continues with Canadian home re-sales rising to a record 46,450 units in November, as the housing market helps to pull the economy out of recession. Seasonally adjusted sales in November climbed 67% from a year earlier, the Canadian Real Estate Association said in a statement. The Bank of Canada has predicted growth in housing investment will stay brisk until early 2010, and then slow as pent-up demand is satisfied and affordability declines. The bank lowered its benchmark lending rate to a record 0.25% in April to spur domestic demand and pledged to leave it there through June unless the inflation outlook changes. Canadian consumer prices rose at their fastest pace in eight months in November because of higher gasoline costs. Retail prices for gasoline climbed 14% from a year earlier compared with October's drop of 13%.

MXN - The Peso saw a bit of a roller coaster ride as well last week ranging 2.7% from a low of 12.6488 to as high as 12.9848 on mixed risk sentiment, mostly negative, in the markets. Mexico's Agustin Carstens, who was nominated last week to become the next central bank governor, told lawmakers that the government's finances are sound after Standard & Poor's cut the country's credit rating. The revisions that have been made to our rating in no way imply unsustainability, Carstens told the Senate finance panel. Signs of nascent recovery in Mexico were evidenced last week when Mexico's public works development bank announced plans to reduce lending 31% next year as the credit market for infrastructure investment recovers. Mexico's central bank sold $250 million to buy pesos at a local auction last week. Banco de Mexico has intervened through periodic auctions to shore up the peso since the global financial crisis sent it tumbling in October 2008.

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